Good Inflation, Bad Inflation: Implications for Risky Asset Prices
71 Pages Posted: 18 Apr 2024 Last revised: 13 Jan 2025
Date Written: January 01, 2025
Abstract
Using inflation swap prices, we study how changes in expected inflation affect firm-level credit spreads and equity returns, and uncover evidence of a time-varying inflation sensitivity. In times of “good inflation,” when inflation news is perceived by investors to be more positively correlated with real economic growth, movements in expected inflation substantially reduce corporate credit spreads and raise equity valuations. Meanwhile in times of “bad inflation,” these effects are attenuated and the opposite can take place. These dynamics naturally arise in an equilibrium asset pricing model with a time-varying inflation-growth relationship and persistent macroeconomic expectations.
Keywords: Time Variation, Asset Prices, Stock-Bond Correlation, Inflation Sensitivity
JEL Classification: E31, E44, G12
Suggested Citation: Suggested Citation
Bonelli, Diego and Palazzo, Berardino and Yamarthy, Ram, Good Inflation, Bad Inflation: Implications for Risky Asset Prices (January 01, 2025). Available at SSRN: https://ssrn.com/abstract=4798269 or http://dx.doi.org/10.2139/ssrn.4798269
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