Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation
81 Pages Posted: 31 Mar 2021 Last revised: 29 Mar 2022
Date Written: March 2021
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 less (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: behavioral biases, Individual investors, inflation, Investor Behavior, Money illusion
JEL Classification: D14, E31, G11, G41, N14
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