Inflation Expectations and Stock Returns

49 Pages Posted: 18 Jul 2022 Last revised: 19 Sep 2023

See all articles by Manav Chaudhary

Manav Chaudhary

University of Chicago - Booth School of Business; University of Chicago - Department of Economics

Benjamin Marrow

University of Chicago - Booth School of Business; University of Chicago - Department of Economics

Date Written: July 5, 2022

Abstract

Do stocks protect against rising inflation expectations? We directly measure investors' expectations using traded inflation-indexed contracts and show that, post-2000, stocks offer positive returns in response to higher expected inflation: unconditionally, a 10 basis point increase in 10-year breakeven inflation is associated with a 1.1% increase in the value-weighted stock index. Using high-frequency identification around scheduled CPI releases, we show this relationship is likely causal. We provide evidence that the price increase is driven by lowering future expected excess returns rather than changing risk-free rates or cashflows; VAR decompositions of returns as well as mediation regressions that directly control for alternate channels attribute nearly all the changes to expected excess returns. Finally, we show inflation expectations predict future output and reduced volatility, suggesting that investors use information about high future inflation as a signal for economic growth, lowering risk premia.

Suggested Citation

Chaudhary, Manav and Marrow, Benjamin, Inflation Expectations and Stock Returns (July 5, 2022). Available at SSRN: https://ssrn.com/abstract=4154564 or http://dx.doi.org/10.2139/ssrn.4154564

Manav Chaudhary (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Benjamin Marrow

University of Chicago - Booth School of Business ( email )

5807 S Woodlawn Ave
Chicago, IL 60637
United States

University of Chicago - Department of Economics ( email )

1101 East 58th Street
Chicago, IL 60637
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
1,026
Abstract Views
2,922
Rank
37,052
PlumX Metrics