The Relative Price Premium

95 Pages Posted: 3 Jan 2023 Last revised: 17 Jan 2025

See all articles by Yun Joo An

Yun Joo An

Indiana University - Kelley School of Business - Department of Finance

Fotis Grigoris

University of Iowa - Department of Finance

Christian Heyerdahl-Larsen

BI Norwegian Business School

Preetesh Kantak

Kelley School of Business

Date Written: January 15, 2025

Abstract

This study shows that relative output price dispersion impacts risk premia. High price dispersion carries a negative price of risk, and firms associated with goods that have risen (fallen) in price compared to the PCE price index earn high (low) returns. We refer to this 0.35% per month return spread as the relative price premium. We rationalize these facts via a consumption-based model featuring imperfectly substitutable goods and an investor with preferences for the mix of goods consumed. Shocks to relative prices induce the investor to consume bundles that deviate from their desired mix, signaling bad times for the economy.

Keywords: Relative Prices, Asset Prices, Inflation, PCE, Dispersion

Suggested Citation

An, Yun Joo and Grigoris, Fotis and Heyerdahl-Larsen, Christian and Kantak, Preetesh, The Relative Price Premium (January 15, 2025). Available at SSRN: https://ssrn.com/abstract=4316133 or http://dx.doi.org/10.2139/ssrn.4316133

Yun Joo An

Indiana University - Kelley School of Business - Department of Finance

Fotis Grigoris (Contact Author)

University of Iowa - Department of Finance ( email )

Iowa City, IA 52242-1000
United States

Christian Heyerdahl-Larsen

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Preetesh Kantak

Kelley School of Business ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

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