Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

Michael Katz, Hanno Lustig and Lars Nielsen

The Review of Financial Studies, 2017, vol. 30, issue 2, 539-587

Abstract: Local stock markets adjust sluggishly to changes in local inflation. When the local rate of inflation increases, local investors subsequently earn lower real returns on local stocks, but not on local bonds or foreign stocks, suggesting that local stock market investors use sticky long-run nominal discount rates that are too low when inflation increases because they are slow to update the inflation expectations in discount rates. Small amounts of stickiness in inflation expectations suffice to match the real stock return predictability induced by inflation in the data. We also consider other explanations, such as nominal cash flow extrapolation.Received September 14, 2015; editorial decision June 30, 2016 by Editor Stefan Nagel.

JEL-codes: E43 G12 G15 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (13)

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