Inflation illusion or no illusion: what did pre- and post-war data say?
AbstractCampbell and Vuolteenaho (CV, 2004) empirically decompose the S&P 500's dividend yield from 1927 to 2002 to derive a measure of residual mispricing attributed to inflation illusion. They argue that the strong positive correlation between the mispricing component and inflation is strong evidence for the inflation illusion hypothesis. We find evidence for structural instability in their prediction equation for the excess return. We apply the same decomposition approach to the data before and after 1952, and find that the correlation between inflation and the mispricing component is close to zero in the post-war period, when inflation and the dividend yield are strongly positively correlated. The post-war data do not support the inflation illusion hypothesis as the explanation for the positive correlation between inflation and dividend yields.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Taylor & Francis Journals in its journal Applied Financial Economics.
Volume (Year): 21 (2011)
Issue (Month): 21 ()
Contact details of provider:
Web page: http://www.tandfonline.com/RAFE20
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Geert Bekaert & Eric Engstrom, 2009.
"Inflation and the Stock Market:Understanding the "Fed Model","
NBER Working Papers
15024, National Bureau of Economic Research, Inc.
- Bekaert, Geert & Engstrom, Eric, 2010. "Inflation and the stock market: Understanding the "Fed Model"," Journal of Monetary Economics, Elsevier, vol. 57(3), pages 278-294, April.
- Geert Bekaert & Eric Engstrom, 2009. "Inflation and the stock market: Understanding the “Fed Model”," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
- Francesco Bianchi, 2010.
"Rare Events, Financial Crises, and the Cross-Section of Asset Returns,"
10-40, Duke University, Department of Economics.
- Bianchi, Francesco, 2008. "Rare Events, Financial Crises, and the Cross-Section of Asset Returns," MPRA Paper 20831, University Library of Munich, Germany, revised 01 Jan 2010.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty).
If references are entirely missing, you can add them using this form.