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Inflation illusion and the US dividend yield: Some further evidence

  • Acker, Daniella
  • Duck, Nigel W.
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    This paper uses Campbell and Vuolteenaho's (2004a,b) procedure to provide evidence on the source of the positive correlation between the US dividend yield and expected inflation. It finds that results derived from the procedure are sensitive to the data period but that Chen and Zhao's (2009) criticism of it is of minor importance. Over the period when the procedure produces stable results – 1953–1989 – we find support for Modigliani and Cohn's (1979) money-illusion hypothesis, little support for Fama's (1981) proxy hypothesis, and strong evidence against the hypothesis that rises in expected inflation raise subjective real equity premia.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0261560612002197
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    Article provided by Elsevier in its journal Journal of International Money and Finance.

    Volume (Year): 33 (2013)
    Issue (Month): C ()
    Pages: 235-254

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    Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:235-254
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30443

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    2. Geert Bekaert & Eric Engstrom, 2009. "Inflation and the stock market: Understanding the “Fed Model”," Proceedings, Federal Reserve Bank of San Francisco, issue Jan.
    3. Polk, Christopher & Thompson, Samuel & Vuolteenaho, Tuomo, 2006. "Cross-sectional forecasts of the equity premium," Journal of Financial Economics, Elsevier, vol. 81(1), pages 101-141, July.
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    7. Brandt, Michael W. & Wang, Kevin Q., 2003. "Time-varying risk aversion and unexpected inflation," Journal of Monetary Economics, Elsevier, vol. 50(7), pages 1457-1498, October.
    8. Campbell, John & Vuolteenaho, Tuomo, 2004. "Bad Beta, Good Beta," Scholarly Articles 3122489, Harvard University Department of Economics.
    9. John Y. Campbell & Tuomo Vuolteenaho, 2004. "Inflation Illusion and Stock Prices," NBER Working Papers 10263, National Bureau of Economic Research, Inc.
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    16. Randolph B. Cohen & Christopher Polk & Tuomo Vuolteenaho, 2005. "Money Illusion in the Stock Market: The Modigliani-Cohn Hypothesis," NBER Working Papers 11018, National Bureau of Economic Research, Inc.
    17. Kaul, Gautam, 1987. "Stock returns and inflation : The role of the monetary sector," Journal of Financial Economics, Elsevier, vol. 18(2), pages 253-276, June.
    18. Oxman, Jeffrey, 2012. "Price inflation and stock returns," Economics Letters, Elsevier, vol. 116(3), pages 385-388.
    19. Lee, Bong-Soo, 2003. " Asset Returns and Inflation in Response to Supply, Monetary, and Fiscal Disturbances," Review of Quantitative Finance and Accounting, Springer, vol. 21(3), pages 207-31, November.
    20. Chen, Long, 2009. "On the reversal of return and dividend growth predictability: A tale of two periods," Journal of Financial Economics, Elsevier, vol. 92(1), pages 128-151, April.
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    23. Lee, Bong Soo, 2010. "Stock returns and inflation revisited: An evaluation of the inflation illusion hypothesis," Journal of Banking & Finance, Elsevier, vol. 34(6), pages 1257-1273, June.
    24. Tom Engsted & Thomas Q. Pedersen, 2009. "The dividend-price ratio does predict dividend growth: International evidence," CREATES Research Papers 2009-36, School of Economics and Management, University of Aarhus.
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