Investing in Deflation, Inflation, and Stagflation Regimes
Financial Analysts Journal, 2023, Vol. 79. No.3., p.5-32.
45 Pages Posted: 7 Jul 2022 Last revised: 9 Sep 2023
Date Written: July 6, 2022
We examine asset class and factor premiums across inflationary regimes. As periods of deflation, high inflation and especially stagflation are relatively uncommon in recent history, we use a deep sample starting in 1875. Moderate inflation scenarios provide the highest returns across asset class and factor premiums. During deflationary periods, nominal returns are low, but real returns are attractive. By contrast, real equity and bond returns are negative during a high inflation regime, and especially so during times of stagflation. During these ‘bad times’ factor premiums are positive, which helps to offset part of the real capital losses.
Keywords: inflation, deflation, stagflation, equity returns, bond returns, factor premiums
JEL Classification: G11, G12, G15, E31, E32
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