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Risk, Inflation, and the Stock Market

Robert S. Pindyck

Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)

August 1983

NBER Working Paper No. w1186

Most explanations for the decline in share values over the past two decades have focused on the concurrent increase in inflation.This paper considers an alternative explanation: a substantial increase in the riskiness of capital investments. We show that the variance of firms' real gross marginal return on capital has increased significantly, increasing the relative riskiness of investors' returns on equity, and that this can explain a large part of the market decline. We also assess the effects of increase in the mean and variance of the inflation rate, and a decline in firms' expected return on capital.

Number of Pages in PDF File: 34

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Date posted: June 28, 2004  

Suggested Citation

Pindyck, Robert S., Risk, Inflation, and the Stock Market (August 1983). NBER Working Paper No. w1186. Available at SSRN: http://ssrn.com/abstract=305566

Contact Information

Robert S. Pindyck (Contact Author)
Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )
50 Memorial Drive, E52-450
Cambridge, MA 02142
United States
617-253-6641 (Phone)
617-258-6855 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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