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Real Asset Returns and Components of Inflation: A Structural VAR Analysis

Author

Listed:
  • Matthias HAGMANN

    (HEC-University of Lausanne and FAME)

  • Carlos LENZ

    (University of Basel, Department of Economics)

Abstract

We shed new light on the negative relationship between real stock returns or real interest rates and (i) post inflation, (ii) expected inflation, (iii) unexpected inflation and (iv) changes in expected inflation. Using the structural vector autoregression methodology, we propose a decomposition of those series into economically interpretable components driven by aggregate supply, real demand and money market shocks. Our empirical results support Fama’s ‘proxy hypothesis’ and the predictions of several general equilibrium models. Concerning the negative relation between the real rate of interest and inflation, we find that the Mundell-Tobin model and the explanation of Fama and Gibbons (1982) are not competitors: both add insight in their own way about the reasons for the negative correlation between those variables. However, the importance of the latter explanation decreased since the 1980’s.

Suggested Citation

  • Matthias HAGMANN & Carlos LENZ, 2004. "Real Asset Returns and Components of Inflation: A Structural VAR Analysis," FAME Research Paper Series rp118, International Center for Financial Asset Management and Engineering.
    • Handle: RePEc:fam:rpseri:rp118
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    File URL: http://www.swissfinanceinstitute.ch/rp118.pdf
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    Cited by:

    1. Ciner, Cetin, 2015. "Are equities good inflation hedges? A frequency domain perspective," Review of Financial Economics, Elsevier, vol. 24(C), pages 12-17.
    2. Díaz, Antonio & Jareño, Francisco, 2009. "Explanatory factors of the inflation news impact on stock returns by sector: The Spanish case," Research in International Business and Finance, Elsevier, vol. 23(3), pages 349-368, September.
    3. Francisco Jareno, 2008. "Spanish stock market sensitivity to real interest and inflation rates: an extension of the Stone two-factor model with factors of the Fama and French three-factor model," Applied Economics, Taylor & Francis Journals, vol. 40(24), pages 3159-3171.
    4. Pesce, Gabriela & Pedroni, Florencia Verónica, 2021. "Inflación y rendimientos en mercados emergentes: el caso de Argentina || Inflation and returns in emerging markets: the case of Argentina," Revista de Métodos Cuantitativos para la Economía y la Empresa = Journal of Quantitative Methods for Economics and Business Administration, Universidad Pablo de Olavide, Department of Quantitative Methods for Economics and Business Administration, vol. 32(1), pages 341-375, December.
    5. Cetin Ciner, 2015. "Are equities good inflation hedges? A frequency domain perspective," Review of Financial Economics, John Wiley & Sons, vol. 24(1), pages 12-17, January.

    More about this item

    Keywords

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    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G1 - Financial Economics - - General Financial Markets

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