IDEAS home Printed from https://ideas.repec.org/a/cup/jfinqa/v22y1987i03p285-297_01.html
   My bibliography  Save this article

Equilibrium under Uncertain Inflation: A Discrete Time Approach

Author

Listed:
  • Levy, Haim
  • Levy, Azriel

Abstract

Most research dealing with portfolio selection under uncertain inflation is carried out by assuming either one of the following two approximations: a linear or a quadratic approximation. In this paper, we analyze the general case, namely assume that the nominal return is the product of the real return and one plus the rate of inflation. We demonstrate that the general analysis leads to the following results that are not found in the two approximations: (1) even if we assume that nominal returns are independent of inflation, the nominal and real efficient sets will not necessarily coincide. Mean-Variance (M-V) analysis leads to a nominal efficient set, that is, a subset of the real M-V efficient set, whereas the opposite holds assuming investors maximize expected utility of real wealth. (2) Similar results are obtained when real returns are independent of inflation (the Fisher hypothesis). Assuming normality of nominal returns, we derive the CAPM in real terms or its zero beta counterpart.

Suggested Citation

  • Levy, Haim & Levy, Azriel, 1987. "Equilibrium under Uncertain Inflation: A Discrete Time Approach," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 22(3), pages 285-297, September.
    • Handle: RePEc:cup:jfinqa:v:22:y:1987:i:03:p:285-297_01
    as

    Download full text from publisher

    File URL: https://www.cambridge.org/core/product/identifier/S0022109000012631/type/journal_article
    File Function: link to article abstract page
    Download Restriction: no
    ---><---

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Cartea, Álvaro & Saúl, Jonatan & Toro, Juan, 2012. "Optimal portfolio choice in real terms: Measuring the benefits of TIPS," Journal of Empirical Finance, Elsevier, vol. 19(5), pages 721-740.
    2. Tung Liang Liao, 2005. "Size Anomaly on the Taiwan Stock Exchange," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 4(1), pages 81-100, April.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:cup:jfinqa:v:22:y:1987:i:03:p:285-297_01. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Kirk Stebbing (email available below). General contact details of provider: https://www.cambridge.org/jfq .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.