Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation

Review of Financial Studies, forthcoming

78 Pages Posted: 15 Mar 2021 Last revised: 31 May 2023

See all articles by Fabio Braggion

Fabio Braggion

Tilburg University - Tilburg University School of Economics and Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Felix von Meyerinck

University of Zurich - Department of Banking and Finance

Nic Schaub

WHU - Otto Beisheim School of Management

Date Written: May 18, 2023

Abstract

We analyze how individual investors respond to inflation. We introduce a unique dataset containing information on local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the German hyperinflation. We find that individual investors buy fewer (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. Moreover, we document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with individual investors suffering from money illusion. Alternative explanations, such as consumption needs, are unlikely to drive our results.

Keywords: inflation, investor behavior, individual investors, behavioral biases, money illusion

JEL Classification: D14, E31, G11, G41, N14

Suggested Citation

Braggion, Fabio and von Meyerinck, Felix and Schaub, Nic, Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation (May 18, 2023). Review of Financial Studies, forthcoming, Available at SSRN: https://ssrn.com/abstract=3802488 or http://dx.doi.org/10.2139/ssrn.3802488

Fabio Braggion

Tilburg University - Tilburg University School of Economics and Management ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Felix Von Meyerinck (Contact Author)

University of Zurich - Department of Banking and Finance ( email )

Plattenstr 32
Zurich, 8032
Switzerland

Nic Schaub

WHU - Otto Beisheim School of Management ( email )

Burgplatz 2
Vallendar, 56179
Germany

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