Time-Varying Inflation Risk and Stock Returns

61 Pages Posted: 4 Jun 2013 Last revised: 14 Nov 2018

See all articles by Martijn Boons

Martijn Boons

New University of Lisbon - Nova School of Business and Economics

Fernando Duarte

Federal Reserve Bank of New York

Frans de Roon

Tilburg University - Department of Finance

Marta Szymanowska

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

Multiple version iconThere are 2 versions of this paper

Date Written: November 2018

Abstract

We show that inflation risk is priced into stock returns and that inflation premia in the cross section and the aggregate market vary over time—even changing sign, as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks' inflation betas can account for the size, variability, predictability, and sign reversals in inflation risk premia.

Keywords: inflation, time-varying inflation risk premium, inflation hedging, cross-sectional asset pricing, nominal-real covariance

JEL Classification: G11, G12, G13

Suggested Citation

Boons, Martijn and Duarte, Fernando and de Roon, Frans A. and Szymanowska, Marta, Time-Varying Inflation Risk and Stock Returns (November 2018). FRB of New York Staff Report No. 621. Available at SSRN: https://ssrn.com/abstract=2273666 or http://dx.doi.org/10.2139/ssrn.2273666

Martijn Boons

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

Campus de Campolide
Lisbon, 1099-032
Portugal

Fernando Duarte (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

HOME PAGE: http://www.newyorkfed.org/research/economists/duarte/index.html

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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