Durable Goods, Inflation Risk, and Equilibrium Asset Prices

62 Pages Posted: 17 Mar 2011 Last revised: 11 Jan 2016

Bjorn Eraker

University of Wisconsin - Madison - Department of Finance, Investment and Banking

Ivan Shaliastovich

University of Wisconsin - Madison

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance

Date Written: January 1, 2015

Abstract

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.

Keywords: durable consumption, inflation risk, long-run risks, equilibrium yield curve, equilibrium equity return

Suggested Citation

Eraker, Bjorn and Shaliastovich, Ivan and Wang, Wenyu, Durable Goods, Inflation Risk, and Equilibrium Asset Prices (January 1, 2015). AFA 2013 San Diego Meetings Paper; Review of Financial Studies (2016) 29(1): 193-231; AFA 2013 San Diego Meetings Paper; Kelley School of Business Research Paper No. 2015-01. Available at SSRN: https://ssrn.com/abstract=1786968 or http://dx.doi.org/10.2139/ssrn.1786968

Bjorn Eraker (Contact Author)

University of Wisconsin - Madison - Department of Finance, Investment and Banking ( email )

975 University Avenue
Madison, WI 53706
United States

Ivan Shaliastovich

University of Wisconsin - Madison ( email )

716 Langdon Street
Madison, WI 53706-1481
United States

Wenyu Wang

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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