The effects of stochastic inflation on asset prices
Stochastic inflation affects the risk characteristics, measured by the equity premium and the correlation of the equity’s return with consumption, in a fundamental way. The riskiness of a dollar-denominated asset depends on two conditional covariances: the covariance of the marginal rate of substitution (MRS) with the equity price and the covariance of the MRS with the rate of appreciation in the purchasing power of money. The second covariance may take either sign which becomes significant when the risk characteristics of the dollar-denominated asset are compared with the risk characteristics of an indexed asset constructed in a real version of the model. ; The effects of stochastic inflation on the assets’ risk characteristics are studied in a parameterized version of a cash-in-advance asset- pricing model. The growth rates of the endowment and monetary transfer evolve according to a VAR. The equity price is a geometric distributed lead of log–normally distributed random variables; an algorithm to express the price as an explicit function of the state variables is described.
|Date of creation:||1988|
|Contact details of provider:|| Postal: 90 Hennepin Avenue, P.O. Box 291, Minneapolis, MN 55480-0291|
Phone: (612) 204-5000
Web page: http://minneapolisfed.org/
More information through EDIRC
|Order Information:|| Web: http://www.minneapolisfed.org/pubs/ Email: |
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- David K. Backus & Allan W. Gregory & Stanley E. Zin, 1986.
"Risk Premiums in the Term Structure : Evidence from Artificial Economies,"
665, Queen's University, Department of Economics.
- Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
- LeRoy, Stephen F, 1984. "Nominal Prices and Interest Rates in General Equilibrium: Money Shocks," The Journal of Business, University of Chicago Press, vol. 57(2), pages 177-195, April.
- Labadie, Pamela, 1989.
"Stochastic inflation and the equity premium,"
Journal of Monetary Economics,
Elsevier, vol. 24(2), pages 277-298, September.
- Pamela Labadie, 1989. "Stochastic inflation and the equity premium," Discussion Paper / Institute for Empirical Macroeconomics 12, Federal Reserve Bank of Minneapolis.
- Grossman, Sanford J & Shiller, Robert J, 1981.
"The Determinants of the Variability of Stock Market Prices,"
American Economic Review,
American Economic Association, vol. 71(2), pages 222-227, May.
- S. Grossman & R. Shiller, "undated". "The Determinants of the Variability of Stock Market Price," Rodney L. White Center for Financial Research Working Papers 18-80, Wharton School Rodney L. White Center for Financial Research.
- Sanford J. Grossman & Robert J. Shiller, 1980. "The Determinants of the Variability of Stock Market Prices," NBER Working Papers 0564, National Bureau of Economic Research, Inc.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Campbell, John, 1987.
"Stock Returns and the Term Structure,"
3207699, Harvard University Department of Economics.
- R. Mehra & E. Prescott, 2010.
"The equity premium: a puzzle,"
Levine's Working Paper Archive
1401, David K. Levine.
- Campbell, John, 1986.
"Bond and Stock Returns in a Simple Exchange Model,"
3122544, Harvard University Department of Economics.
- LeRoy, Stephen F, 1984. "Nominal Prices and Interest Rates in General Equilibrium: Endowment Shocks," The Journal of Business, University of Chicago Press, vol. 57(2), pages 197-213, April.
- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-1286, September.
- Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
- Svensson, Lars E O, 1985. "Money and Asset Prices in a Cash-in-Advance Economy," Journal of Political Economy, University of Chicago Press, vol. 93(5), pages 919-944, October.
When requesting a correction, please mention this item's handle: RePEc:fip:fedmem:5. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Janelle Ruswick)
If references are entirely missing, you can add them using this form.