Inflation and Risky Investments

Hannu Laurila and Jukka Ilomäki
Additional contact information
Hannu Laurila: Faculty of Management and Business, Tampere University, FI-33014 Tampere, Finland

JRFM, 2020, vol. 13, issue 12, 1-10

Abstract: The paper uses a Walrasian two-period financial market model with informed and uninformed constant absolute risk averse (CARA) rational investors and noise traders. The investors allocate their initial wealth between risky assets and risk-free fiat money. The analysis concentrates on the effects of decreasing value of money, or inflation, on the rational investors’ behavior and the asset market. The main findings are the following: Inflation does not affect the informed investors’ prediction coefficient but makes that of the uninformed investors diminish. Inflation does not affect rational investors’ risk but makes the asset price more sensitive to fundament-based and sentiment-based shocks. Inflation changes the market price of the risky asset rise; while it has no effects on the informed investors’ demand of the risky asset, it does affect the uninformed investors’ demand. Finally, inflation makes the asset market more volatile.

Keywords: Constant Absolute Risk Averse (CARA) utility function; information; negative interest rates; volatility (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.mdpi.com/1911-8074/13/12/329/pdf (application/pdf)
https://www.mdpi.com/1911-8074/13/12/329/ (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:gam:jjrfmx:v:13:y:2020:i:12:p:329-:d:465818

Access Statistics for this article

JRFM is currently edited by Ms. Chelthy Cheng

More articles in JRFM from MDPI
Bibliographic data for series maintained by MDPI Indexing Manager ().