include any dividends what underestimates the total return of investments (ftse.com). Nevertheless, the conclusion should remain the same.
Real Market Index Nominal Market Index
For the comparison between the real and the nominal stock prices from February 1988 to November 2012 the nominal prices have been adjusted by the Consumer Price Index1
01/1988 10/1988 07/1989 04/1990 01/1991 10/1991 07/1992 04/1993 01/1994 10/1994 07/1995 04/1996 01/1997 10/1997 07/1998 04/1999 01/2000 10/2000 07/2001 04/2002 01/2003 10/2003 07/2004 04/2005 01/2006 10/2006 07/2007 04/2008 01/2009 10/2009 07/2010 04/2011 01/2012 10/2012
(CPI) (basis 31.01.1988). The real prices better represent the true performance an investor achieved over this period.
Inflation risk, especially for long time horizons, can be substantial to the purchasing power of any investors’ dollar and must be considered in every investment decision. The holding period return (HPR) of nominal 233.68% and real 66.30% shows that a large part of the price increases in the ASX index can be attributed to inflation.
The figure with the monthly arithmetric percentage changes shows that the returns both real and nominal tend to be meanreverting over time whereas the mean tend to be slightly positive. It indicates a large portion of outliers during high volatile periods which probably indicate that the returns do not follow a normal distribution. The volatile returns seem to be positive auto correlated over a specific time before returning to the mean. This lead to these volatility clusters in the figure. From the statistical figures of the nominal returns, it is observable that the monthly returns not follow the normal distribution. With a skewness of -0.3878 and a kurtosis of 3.6047 the distribution follows a leptokurtic distribution. JarqueBera test confirms (p-value 0.0025) on a significant level of 95% that the statistical moments kurtosis and skewness do not follow normality. In summary, outliers are more often than given by normality (1) (Mandelbrot 1963; Fama 1963) and return drawbacks are more often than booms (2) (Fama 1965;