Inflation Illusion and Stock Prices
Tuomo Vuolteenaho and
John Campbell ()
Scholarly Articles from Harvard University Department of Economics
We empirically decompose the S&P 500's dividend yield into (1) a rational forecast of long-run real dividend growth, (2) the subjectively expected risk premium, and (3) residual mispricing attributed to the market's forecast of dividend growth deviating from the rational forecast. Modigliani and Cohn's (1979) hypothesis and the persistent use of the "Fed model" by Wall Street suggest that the stock market incorrectly extrapolates past nominal growth rates without taking into account the impact of time-varying inflation. Consistent with the Modigliani-Cohn hypothesis, we find that the level of inflation explains almost 80% of the time-series variation in stock-market mispricing.
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (108) Track citations by RSS feed
Published in American Economic Review
Downloads: (external link)
http://dash.harvard.edu/bitstream/handle/1/3196090 ... nflationillusion.pdf (application/pdf)
Journal Article: Inflation Illusion and Stock Prices (2004)
Working Paper: Inflation Illusion and Stock Prices (2004)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:hrv:faseco:3196090
Access Statistics for this paper
More papers in Scholarly Articles from Harvard University Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Office for Scholarly Communication ().