Capital Gains, Dividend Yields, and Expected Inflation

Posted: 15 Jul 2002


One explanation for the negative relationship between short-horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets.

Keywords: Stock returns, inflation, monetary policy

JEL Classification: G12, E40

Suggested Citation

Pilotte, Eugene A., Capital Gains, Dividend Yields, and Expected Inflation. Available at SSRN:

Eugene A. Pilotte (Contact Author)

Rutgers Business School - Camden ( email )

227 Penn Street
Camden, NJ 08102
United States
856-225-6548 (Phone)

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