Inflation illusion or no illusion: what did pre- and post-war data say?

Chao Wei and Fred Joutz

Applied Financial Economics, 2011, vol. 21, issue 21, 1599-1603

Abstract: Campbell and Vuolteenaho (CV, 2004) empirically decompose the S&P 500's dividend yield from 1927 to 2002 to derive a measure of residual mispricing attributed to inflation illusion. They argue that the strong positive correlation between the mispricing component and inflation is strong evidence for the inflation illusion hypothesis. We find evidence for structural instability in their prediction equation for the excess return. We apply the same decomposition approach to the data before and after 1952, and find that the correlation between inflation and the mispricing component is close to zero in the post-war period, when inflation and the dividend yield are strongly positively correlated. The post-war data do not support the inflation illusion hypothesis as the explanation for the positive correlation between inflation and dividend yields.

Keywords: inflation illusion; mispricing; structural instability; decomposition approach (search for similar items in EconPapers)
Date: 2011
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Downloads: (external link)
http://www.tandfonline.com/doi/abs/10.1080/09603107.2011.587771 (text/html)
Access to full text is restricted to subscribers.

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:taf:apfiec:v:21:y:2011:i:21:p:1599-1603

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RAFE20

DOI: 10.1080/09603107.2011.587771

Access Statistics for this article

Applied Financial Economics is currently edited by Anita Phillips

More articles in Applied Financial Economics from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().