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Time-varying inflation risk and stock returns

Author

Listed:
  • Boons, Martijn
  • Duarte, Fernando
  • de Roon, Frans
  • Szymanowska, Marta
Abstract
We show that inflation risk is priced in stock returns and that inflation risk premia in the cross-section and the aggregate market vary over time, even changing sign as in the early 2000s. This time variation is due to both price and quantities of inflation risk changing over time. Using a consumption-based asset pricing model, we argue that inflation risk is priced because inflation predicts real consumption growth. The historical changes in this predictability and in stocks’ inflation betas can account for the size, variability, predictability, and sign reversals in inflation risk premia.

Suggested Citation

  • Boons, Martijn & Duarte, Fernando & de Roon, Frans & Szymanowska, Marta, 2020. "Time-varying inflation risk and stock returns," Journal of Financial Economics, Elsevier, vol. 136(2), pages 444-470.
    • Handle: RePEc:eee:jfinec:v:136:y:2020:i:2:p:444-470
    DOI: 10.1016/j.jfineco.2019.09.012
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    More about this item

    Keywords

    Inflation; Time-varying inflation risk premium; Inflation hedging; Individual stock returns; Cross-sectional asset-pricing; Nominal-real covariance;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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