Getting to the Core: Inflation Risks within and Across Asset Classes

92 Pages Posted: 20 Jun 2022 Last revised: 8 Jun 2023

See all articles by Xiang Fang

Xiang Fang

The University of Hong Kong

Yang Liu

The University of Hong Kong - Faculty of Business and Economics

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 2022

Abstract

Do “real” assets protect against inflation? Core inflation betas of stocks are negative while energy betas are positive; currencies, commodities, and real estate also mostly hedge against energy inflation but not core. These hedging properties are reflected in the prices of inflation risks: only core inflation carries a negative risk premium, and its magnitude is consistent both within and across asset classes, uniquely among macroeconomic risk factors. While high core inflation tends to be followed by low real output, consumption, and dividend payouts, it impacts asset prices through both cash-flow and discount rate channels. The relative contribution of core and energy changes over time, helping explain the time-varying correlation between stock and bond returns. A two-sector New Keynesian model qualitatively accounts for these facts and implies that the changing stock-bond correlation can be attributed to the shifting importance of supply and demand shocks in driving energy inflation over time.

Suggested Citation

Fang, Xiang and Liu, Yang and Roussanov, Nikolai L., Getting to the Core: Inflation Risks within and Across Asset Classes (June 2022). NBER Working Paper No. w30169, Available at SSRN: https://ssrn.com/abstract=4140887

Xiang Fang (Contact Author)

The University of Hong Kong ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

Yang Liu

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Nikolai L. Roussanov

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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