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Inflation risk and equity valuation: a critical review

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  • Andreas Schüler

    (University of the Bundeswehr Munich)

Abstract

This paper reassesses how inflation risk is addressed in CAPM-based equity valuation models. By distinguishing between two consistent valuation frameworks—one assuming a deterministic real interest rate, the other a deterministic nominal rate—we demonstrate that many previous attempts to adjust the CAPM for inflation are either flawed, or equivalent to the standard formulation. Using these frameworks as benchmarks, we critically assess prior contributions and identify inconsistencies. It is shown that the alleged deviations from, and dangers to, correct valuation are largely unfounded, as many proposed modifications prove equivalent to the standard CAPM. The paper emphasizes the need for consistent treatment of inflation across both cash flows and discount rates.

Suggested Citation

  • Andreas Schüler, 2025. "Inflation risk and equity valuation: a critical review," Journal of Business Economics, Springer, vol. 95(7), pages 957-974, September.
    • Handle: RePEc:spr:jbecon:v:95:y:2025:i:7:d:10.1007_s11573-025-01233-y
    DOI: 10.1007/s11573-025-01233-y
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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