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Time-varying inflation risk and stock returns

Martijn Boons, Fernando Duarte (), Frans de Roon and Marta Szymanowska

Journal of Financial Economics, 2020, vol. 136, issue 2, 444-470

Abstract: We show that inflation risk is priced in stock returns and that inflation risk 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.

Keywords: Inflation; Time-varying inflation risk premium; Inflation hedging; Individual stock returns; Cross-sectional asset-pricing; Nominal-real covariance (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Date: 2020
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Working Paper: Time-Varying Inflation Risk and Stock Returns (2016) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:136:y:2020:i:2:p:444-470

DOI: 10.1016/j.jfineco.2019.09.012

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