Stock returns and inflation risk: economic versus statistical evidence

Tomek Katzur and Laura Spierdijk

Applied Financial Economics, 2013, vol. 23, issue 13, 1123-1136

Abstract: A widespread assumption in the economic literature is that an asset is a good hedge against inflation if the Fisher hypothesis holds, that is, if nominal asset returns move in parallel with expected inflation. We propose a new measure for assessing the inflation risk exposure of an asset. This measure reflects the economic influence of inflation rates on asset returns in a context of portfolio optimization and accounts for parameter uncertainty. We show that the economic significance of the influence of expected inflation on stock returns can be substantial, despite a lack of traditional evidence against the Fisher hypothesis.

Date: 2013
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DOI: 10.1080/09603107.2013.797556

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