Risk, Return, and Inflation Expectations
32 Pages Posted: 9 Aug 2019
Date Written: August 6, 2019
This paper asks how inflation shocks affect the risk and return characteristics of different asset classes. For an unanticipated increase in inflation expectations, returns on equities and on the euro (relative to the dollar) increase, while returns on bonds and on gold decrease. Based on option implied volatility and skewness, bonds become more risky, equities and gold become less risky, and the impact on the euro’s riskiness is ambiguous. These findings support the following conclusions: In response to inflation shocks, equities are the most attractive asset class, while bonds are the least attractive. The euro and gold are somewhere in between.
Keywords: Inflation Expectations, Implied Volatility, Implied Skewness
JEL Classification: G12, E44
Suggested Citation: Suggested Citation