The Relation Between Asset Returns and Inflation at Short and Long Horizons

Tom Engsted and Carsten Tanggaard ()
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Carsten Tanggaard: Department of Finance, Aarhus School of Business, Postal: The Aarhus School of Business, Fuglesangs Allé 4, 8210 Aarhus V, Denmark, http://www.asb.dk/staff/afl/cat.aspx?page=%7B061AA9FC-A669-44F4-B298-E9759FA21305%7D

No 00-9, Finance Working Papers from University of Aarhus, Aarhus School of Business, Department of Business Studies

Abstract: In analyzing the relationship between expected stock and bond returns and expected inflation at short and long horizons, we measure multi-period expected returns and inflation from a vector-autoregressive (VAR) model involving only one-period variables. Thereby we circumvent the problems with near-nonstationarity of multi-period returns and inflation, and with the use of time-overlapping data. We apply the VAR approach on long-term US and Danish stock and bond market data, and the results in general point to large differences between these countries, and between stocks and bonds. Expected US bond returns and expected Danish stock returns move closely with expected inflation at long horizons but not at short horizons. For US stocks, by contrast, the relationship between expected returns and inflation is positive but quite weak at all horizons, which is in contrast to the results reported by Boudoukh and Richardson (1993): for US stock returns the Fisher model does not perform better as the horizon increases. Our results imply, however, that for US bonds and Danish stocks, the Fisher model's performance improves as the horizon increases.

Keywords: Fisher Hypothesis; Vector-autoregression (search for similar items in EconPapers)
Pages: 29 pages
Date: 2000-11-01
Note: Later published in Journal of International Financial Markets, Institutions & Money
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Related works:
Journal Article: The relation between asset returns and inflation at short and long horizons (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:hhb:aarfin:2000_009

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