A Theory of the Nominal Character of Stock Securities

Bernard Dumas () and Savioz, Marcel René

No 15507, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence.

Date: 2020-12
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Working Paper: A Theory of the Nominal Character of Stock Securities (2020)
Working Paper: A theory of the nominal character of stock securities (2020)
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