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Economic Hypothesis Test on Ideal Inflation Rate

Hi everyone! My name is Anuraag Gopaluni, and I am a rising junior at Boston University really interested in quantitative finance. I'm a part of the quant research team within the BU Finance and Investment Club, and we've been spending time this summer using the awesome resources provided by Quantopian, namely the Quantopian Lecture Series and Research Environment, to both learn about and apply quantitative finance. What I've posted here is a simple economic hypothesis test about inflation; more specifically, I wanted to see if the claim that the ideal inflation rate is 2-3% was valid. Any feedback or critique would be greatly appreciated.

Also, if anyone is curious to see what other hypothesis testing we're doing, check out these other posts:

https://www.quantopian.com/posts/us-unemployment-rate-as-an-indicator-of-stock-market-performance
https://www.quantopian.com/posts/interest-rates-v-market-volatility

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4 responses

Hey Anuraag,

Great post. I like how you clearly defined your hypothesis from the get-go. Helps reduce a lot of overfitting. Some interesting things to test would be whether your underlying data are stationary, if they are they can cause weird results in common tests. See here for more:
https://www.quantopian.com/lectures/integration-cointegration-and-stationarity

Also, now that you've established likelihood of a relationship, you could start thinking about where the causation mechanism lies. Is it that returns drive behavior which drives inflation? Does inflation drive returns? Do both things occur in some quantity (my money is here). Also you could look at lagged causation. If you offset one series and look at whether a change in one is followed by a change in the other, that's good evidence that there's causation that direction.

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Hi Delaney,

Thank you so much for your comments. You're right, there are various things than can be done now, namely looking at stationarity and identifying potential lagged causation. It would be interesting indeed to see if a change in one series follows a change in the other. Looking forward to expanding on the hypotheses!

Appreciate the feedback.

I would also look at interest rates and oil prices as independent variables.

Hi Dan,
Sorry for the late reply, but thanks for your comment! Hmm yes, it would be interesting indeed to look at oil prices and interest rates as independent variables. I would expect there to be an inverse relationship, but whether or not there is one or whether it is statistically significant is something I can definitely explore. Thanks for the idea!