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Inflation uncertainty and excess returns on stocks and banks

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  • Timothy Cogley

Abstract

This paper investigates the relation between inflation uncertainty and excess returns on stocks and bonds. It quantifies the effect of inflation uncertainty by comparing actual excess returns with those expected by a hypothetical naive investor who treats inflation forecasts as if they were known with certainty. The evidence suggests that ignoring inflation uncertainty results in only small pricing errors, on average.

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File URL: http://www.frbsf.org/economic-research/publications/economic-review/1995/95-2_21-29.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (1995)
Issue (Month): ()
Pages: 21-29

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Handle: RePEc:fip:fedfer:y:1995:p:21-29:n:2

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Keywords: Inflation (Finance) ; Stocks ; Bonds;

References

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  1. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 23(2), pages 169-84, May.
  2. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Working Papers 4088, National Bureau of Economic Research, Inc.
  3. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  4. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(2), pages 225-62, April.
  5. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 24(3), pages 371-399, November.
  6. Giovannini, Alberto & Labadie, Pamela, 1991. "Asset Prices and Interest Rates in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 99(6), pages 1215-51, December.
  7. Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics, Federal Reserve Bank of Minneapolis 12, Federal Reserve Bank of Minneapolis.
  8. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1429-45, November.
  9. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 15(1), pages 57-85, January.
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Cited by:
  1. Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, Federal Reserve Bank of San Francisco, pages 3-14.

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