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;

Access Documents

File(s): File format is text/html
Description: Summary

File(s): File format is application/pdf
Description: Full text

File(s): File format is application/pdf
Description: Appendix


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.