Time-varying inflation risk and stock returns

Martijn Boons, Fernando Duarte, Frans de Roon, M. Szymanowska

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We show that inflation risk is priced into stock returns and that inflation premia in the cross section and the aggregate market vary over time—even changing sign, as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks' inflation betas can account for the size, variability, predictability, and sign reversals in inflation risk premia.
Original languageEnglish
JournalJournal of Financial Economics
DOIs
Publication statusE-pub ahead of print - Sep 2019

Fingerprint

Time-varying
Risk-return
Stock returns
Inflation risk
Inflation
Predictability
Time variation
Consumption-based asset pricing
Asset pricing models
Reversal
Cross section
Consumption growth
Risk premia

Keywords

  • inflation
  • time-varying inflation risk premium
  • inflation hedging
  • cross-sectional asset pricing
  • nominal-real covariance

Cite this

Boons, Martijn ; Duarte, Fernando ; de Roon, Frans ; Szymanowska, M. / Time-varying inflation risk and stock returns. In: Journal of Financial Economics. 2019.
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Time-varying inflation risk and stock returns. / Boons, Martijn; Duarte, Fernando; de Roon, Frans; Szymanowska, M.

In: Journal of Financial Economics, 09.2019.

Research output: Contribution to journalArticleScientificpeer-review

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AB - We show that inflation risk is priced into stock returns and that inflation premia in the cross section and the aggregate market vary over time—even changing sign, as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks' inflation betas can account for the size, variability, predictability, and sign reversals in inflation risk premia.

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