Inflation and Real Interest Rates on Assets with Different Risk Characteristics

24 Pages Posted: 8 Mar 2007  

John P. Huizinga

University of Chicago - Booth School of Business

Frederic S. Mishkin

Columbia Business School - Finance and Economics; National Bureau of Economic Research (NBER)

Date Written: April 1984

Abstract

Several recent studies find that ex ante real returns for short-term U.S. Treasury securities are negatively correlated both with inflation and with nominal interest rates. This paper examines whether these findings extend to the short-term holding return on publicly and privately issued securities of longer maturity, are robust with respect to the choice of price index, and are stable over time. Our results show that before 1979 a negative relationship of ex ante real returns with inflation and nominal interest rates does appear for the longer maturity assets. In fact, the relationship grows stronger with increases in maturity length. This suggests that although short-term U.S. Treasury bills were, of all the assets we study, the best hedge against expected inflation, none of the assets were a perfect hedge. We find a statistically significant change in the stochastic process of bond returns in 1979, with nominal interest rates and ex ante real holding returns being positively correlated in this latter period. This is not true for stocks, however. While the above results are robust to the choice of price index, we show that estimating the level of ex ante real returns depends crucially on the price index chosen.

Suggested Citation

Huizinga, John P. and Mishkin, Frederic S., Inflation and Real Interest Rates on Assets with Different Risk Characteristics (April 1984). NBER Working Paper No. w1333. Available at SSRN: https://ssrn.com/abstract=969299

John Huizinga (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7272 (Phone)
773-702-2225 (Fax)

Frederic S. Mishkin

Columbia Business School - Finance and Economics ( email )

3022 Broadway
New York, NY 10027
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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