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Time-Varying Inflation Risk and Stock Returns

Martijn Boons, Frans de Roon, Fernando Duarte and Marta Szymanowska

No 621, Staff Reports from Federal Reserve Bank of New York

Abstract: We show that inflation risk is priced in stock returns and that inflation risk premia in the cross-section and the aggregate market vary over time, even changing sign as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks' inflation betas can account for the size, variability, predictability and sign reversals in inflation risk premia.

Keywords: inflation hedging; nominal-real covariance; time-varying inflation risk premium; inflation; individual stock returns; cross-sectional asset pricing (search for similar items in EconPapers)
JEL-codes: G11 G12 G13 (search for similar items in EconPapers)
Pages: 104 pages
Date: 2013-05-01
New Economics Papers: this item is included in nep-fmk and nep-mac
Note: Previous title: "Time-Varying Inflation Risk and the Cross Section of Stock Returns" Before that, it was: Inflation risk and the cross section of stock returns.
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