Durable Goods, Inflation Risk, and Equilibrium Asset Prices
University of Wisconsin - Madison - Department of Finance, Investment and Banking
University of Pennsylvania - Finance Department
Indiana University - Kelley School of Business - Department of Finance
January 1, 2015
Review of Financial Studies (2016) 29(1): 193-231
AFA 2013 San Diego Meetings Paper
Kelley School of Business Research Paper No. 2015-01
High expected inflation is known to have a negative impact on future real growth. We show that this effect is significantly more pronounced in durable relative to non-durable goods sectors of the economy. Consistent with this macroeconomic evidence, the equity returns of durable-goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a recursive utility model which features persistent growth fluctuations and inflation non-neutrality for durable and non-durable consumption. Our model can quantitatively account for the key moments of nominal bond prices and the levels, volatilities, and exposures of equity returns to expected inflation and bond returns.
Number of Pages in PDF File: 62
Keywords: durable consumption, inflation risk, long-run risks, equilibrium yield curve, equilibrium equity return
Date posted: March 17, 2011 ; Last revised: January 11, 2016
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