Inflation illusion and stock returns

William O. Brown, Dayong Huang and Fang Wang

Journal of Empirical Finance, 2016, vol. 35, issue C, 14-24

Abstract: A large sensitivity of stocks' earnings yield to inflation suggests that the value of these stocks is highly influenced by inflation illusion. We construct an inflation illusion factor by buying stocks with large earnings yield sensitivities on inflation and selling stocks with small earnings yield sensitivities on inflation. This factor has a return of approximately 5% per year and is priced in the cross sectional asset returns. Low asset growth stocks have greater exposure to the inflation illusion factor than their counterparts, and they are also underpriced at times of high inflation. Our results are robust for a number of controls.

Keywords: Inflation illusion; Mispricing; Dividend yields (search for similar items in EconPapers)
JEL-codes: G12 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:35:y:2016:i:c:p:14-24

DOI: 10.1016/j.jempfin.2015.11.001

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