Download this Paper Open PDF in Browser

Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

Review of Financial Studies (Forthcoming)

60 Pages Posted: 12 Jan 2015 Last revised: 14 Aug 2016

Michael Katz

AQR Capital Management, LLC

Hanno N. Lustig

Stanford Graduate School of Business; National Bureau of Economic Research (NBER)

Lars N Nielsen

AQR Capital Management, LLC

Date Written: August 13, 2016

Abstract

Local stock markets adjust sluggishly to changes in local inflation. When the local rate of inflation increases, local investors subsequently earn significantly lower real returns on local stocks, but not on local bonds or foreign stocks. Our results suggest that local stock market investors use sticky long-run nominal discount rates that are too low when inflation increases, because they are slow to update the inflation expectations in discount rates in response to aggregate inflation news. Small amounts of stickiness in inflation expectations suffice to match the real stock return predictability induced by inflation in the data. We also consider other explanations, such as nominal cash flow extrapolation.

Keywords: inflation hedging, inflation expectations

JEL Classification: G11, G12

Suggested Citation

Katz, Michael and Lustig, Hanno N. and Nielsen, Lars N, Are Stocks Real Assets? Sticky Discount Rates in Stock Markets (August 13, 2016). Review of Financial Studies (Forthcoming). Available at SSRN: https://ssrn.com/abstract=2548081 or http://dx.doi.org/10.2139/ssrn.2548081

Michael Katz

AQR Capital Management, LLC ( email )

Two Greenwich Plaza, 3rd Floor
Greenwich, CT 06830
United States
203 742 3854 (Phone)
203 742 3354 (Fax)

HOME PAGE: http://www.aqr.com

Hanno N. Lustig (Contact Author)

Stanford Graduate School of Business ( email )

Stanford GSB
655 Knight Way
Stanford, CA California 94305-6072
United States
3108716532 (Phone)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Lars N Nielsen

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

Paper statistics

Downloads
720
rank
29,254
Abstract Views
3,707