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Inflation illusion and the US dividend yield: Some further evidence

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  • Acker, Daniella
  • Duck, Nigel W.

Abstract

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.

Suggested Citation

  • Acker, Daniella & Duck, Nigel W., 2013. "Inflation illusion and the US dividend yield: Some further evidence," Journal of International Money and Finance, Elsevier, vol. 33(C), pages 235-254.
  • Handle: RePEc:eee:jimfin:v:33:y:2013:i:c:p:235-254 DOI: 10.1016/j.jimonfin.2012.11.018
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    References listed on IDEAS

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    Cited by:

    1. Engsted, Tom & Pedersen, Thomas Q., 2015. "Predicting returns and rent growth in the housing market using the rent-price ratio: Evidence from the OECD countries," Journal of International Money and Finance, Elsevier, vol. 53(C), pages 257-275.
    2. Tom Engsted & Thomas Q. Pedersen, 2016. "The predictive power of dividend yields for future infl?ation: Money illusion or rational causes?," CREATES Research Papers 2016-11, Department of Economics and Business Economics, Aarhus University.
    3. Atilla Cifter, 2015. "Stock Returns, Inflation, and Real Activity in Developing Countries: A Markov-Switching Approach," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 62(1), pages 55-76, March.

    More about this item

    Keywords

    Dividend yield; Inflation; Inflation illusion;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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