Report
Time-Varying Inflation Risk and Stock Returns
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.
Keywords: inflation hedging; nominal-real covariance; time-varying inflation risk premium; inflation; individual stock returns; cross-sectional asset pricing;
JEL Classification: G11; G13; G12;
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Bibliographic Information
Provider: Federal Reserve Bank of New York
Part of Series: Staff Reports
Publication Date: 2016-07-01
Number: 621
Pages: 104 pages
Note: Previous title: "Time-Varying Inflation Risk and the Cross Section of Stock Returns" Before that, it was: Inflation risk and the cross section of stock returns.