The Stock Market Price of Inflation Risk and Its Variation over Time

60 Pages Posted: 14 Mar 2012 Last revised: 19 Nov 2014

See all articles by Martijn Boons

Martijn Boons

New University of Lisbon - Nova School of Business and Economics

Frans de Roon

Tilburg University - Department of Finance

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance; Erasmus Research Institute of Management (ERIM)

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Date Written: November 14, 2014

Abstract

The inflation risk premium (IRP) in the U.S. stock market varies over time. We use individual stocks to estimate the IRP, because this provides us with a heterogeneous cross-section of exposures. We find that the IRP is a significant -5.5% since the 1960s, but reverses to an insignificant positive value in the recent decade. Consistent with this reversal, we find that the IRP is more negative in recessions historically, but more positive in the two latest recessions. We show that both the introduction of Treasury Inflation Protected Securities (TIPS) in 1997, an attractive alternative inflation hedge, and a reversal in the covariance between inflation and the real economy at the end of the 1990s contribute to this reversal. These findings are consistent with inflation as a state variable in the intertemporal capital asset pricing model (ICAPM).

Keywords: Inflation, (Time-Varying) Inflation Risk Premium, Inflation Hedging, Cross-Sectional Asset-Pricing, TIPS, Nominal-Real Covariance

JEL Classification: G11, G12, G13

Suggested Citation

Boons, Martijn and de Roon, Frans A. and Szymanowska, Marta, The Stock Market Price of Inflation Risk and Its Variation over Time (November 14, 2014). Available at SSRN: https://ssrn.com/abstract=2020716 or http://dx.doi.org/10.2139/ssrn.2020716

Martijn Boons (Contact Author)

New University of Lisbon - Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Marta Szymanowska

Erasmus University Rotterdam (EUR) - Department of Finance ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands
+31104089607 (Phone)

HOME PAGE: http://www.rsm.nl/mszymanowska

Erasmus Research Institute of Management (ERIM) ( email )

P.O. Box 1738
3000 DR Rotterdam
Netherlands

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