Inflation and Individual Investors’ Behavior: Evidence from the German Hyperinflation

Fabio Braggion, Felix von Meyerinck and Nic Schaub

No 15947, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We analyze how individual investors respond to inflation. We introduce a unique dataset containing information on local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the German hyperinflation. We find that individual investors buy fewer (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. Moreover, we document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with individual investors suffering from money illusion. Alternative explanations, such as consumption needs, are unlikely to drive our results.

Keywords: inflation; Investor behavior; Money illusion; Individual investors; Behavioral biases (search for similar items in EconPapers)
JEL-codes: D14 E31 G11 G41 N14 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-cba, nep-cwa, nep-his, nep-mac and nep-mon
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