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Risk, Inflation, and the Stock Market

34 Pages Posted: 28 Jun 2004 Last revised: 22 Sep 2008

Robert S. Pindyck

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

Date Written: August 1983

Abstract

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.

Suggested Citation

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

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