A Theory of the Nominal Character of Stock Securities

Bernard Dumas () and Marcel Savioz ()

No 28186, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) house-hold/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 income-driven 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.

JEL-codes: G12 G18 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cwa and nep-fmk
Note: ME AP
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Published as Bernard Dumas & Marcel Savioz, 2023. "A Theory of the Nominal Character of Stock Securities," Review of Finance, vol 27(5), pages 1615-1657.

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Related works:
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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