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Expected inflation, expected stock returns, and money illusion: What can we learn from survey expectations?

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  • Schmeling, Maik
  • Schrimpf, Andreas

Abstract

We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. Empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by thedata.

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Bibliographic Info

Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 55 (2011)
Issue (Month): 5 (June)
Pages: 702-719

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Handle: RePEc:eee:eecrev:v:55:y:2011:i:5:p:702-719

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Web page: http://www.elsevier.com/locate/eer

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Keywords: Inflation expectations Money illusion Proxy hypothesis Return predictability;

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Citations

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Cited by:
  1. Dick, Christian D. & Menkhoff, Lukas, 2013. "Exchange rate expectations of chartists and fundamentalists," Journal of Economic Dynamics and Control, Elsevier, vol. 37(7), pages 1362-1383.
  2. Tomek Katzur & Laura Spierdijk, 2013. "Stock returns and inflation risk: economic versus statistical evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 23(13), pages 1123-1136, July.
  3. Puah, Chin-Hong & Chong, Lucy Lee-Yun & Jais, Mohamad, 2011. "Testing the Rational Expectations Hypothesis on the Retail Trade Sector Using Survey Data from Malaysia," MPRA Paper 36699, University Library of Munich, Germany.
  4. Dick, Christian D. & MacDonald, Ronald & Menkhoff, Lukas, 2011. "Individual exchange rate forecasts and expected fundamentals," ZEW Discussion Papers 11-062, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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