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Journal of Financial Economics Vol. 136 No. 2 2020

Time-varying inflation risk and stock returns

Martijn Boons1; Fernando Duarte2; Frans de Roon; Marta Szymanowska3

1 Universidade Nova de Lisboa · 2 Federal Reserve Bank of New York · 3 Erasmus University Rotterdam

open access

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.

DOI
10.1016/j.jfineco.2019.09.012
Volume
136
Issue
2
Pages
444-470
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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