An Empirical Examination Of The Effects Of Inflation And Hedging On Investments In The U.S. Air Transport Sector Over The Period Since Deregulation

Abstract

Research in economics and finance has documented a negative relationship between stock returns and inflation rates in most economies.  The purpose of this study is to investigate this relationship for a particular specific sector investment, air transportation. A significant negative relationship is shown between the air equity index returns and unexpected inflation.  Air equity returns, however, are found not be correlated with expected inflation.  The Johansen and Juselius cointegration tests verify a long-run equilibrium between air transport equity index, general price levels, and the real economic activity. The short-run dynamics derived from the error-correction model, however,  do not support air transport equity index’s long-run inflation hedging ability. These findings indicate that investing in air transport equity index may not be a reliable hedge against inflation in the long- or short-run.  In addition, the findings do not lend support for the Fisherian and Proxy hypotheses.