The Relation Between Asset Returns and Inflation at Short and Long Horizons
In analyzing the relationship between expected stock and bond returns and expected inflation at short and long horizons, we measure multi-period expected returns and inflation from a vector-autoregressive (VAR) model involving only one-period variables. Thereby we circumvent the problems with near-nonstationarity of multi-period returns and inflation, and with the use of time-overlapping data. We apply the VAR approach on long-term US and Danish stock and bond market data, and the results in general point to large differences between these countries, and between stocks and bonds. Expected US bond returns and expected Danish stock returns move closely with expected inflation at long horizons but not at short horizons. For US stocks, by contrast, the relationship between expected returns and inflation is positive but quite weak at all horizons, which is in contrast to the results reported by Boudoukh and Richardson (1993): for US stock returns the Fisher model does not perform better as the horizon increases. Our results imply, however, that for US bonds and Danish stocks, the Fisher model's performance improves as the horizon increases.
|Date of creation:||01 Nov 2000|
|Note:||Later published in Journal of International Financial Markets, Institutions & Money|
|Contact details of provider:|| Postal: The Aarhus School of Business, Fuglesangs Allé 4, DK-8210 Aarhus V, Denmark|
Fax: + 45 86 15 19 43
Web page: http://www.asb.dk/about/departments/bs.aspx
More information through EDIRC
References listed on IDEAS
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.:
- Campbell, John Y & Ammer, John, 1993.
" What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns,"
Journal of Finance,
American Finance Association, vol. 48(1), pages 3-37, March.
- John Y. Campbell & John Ammer, 1991. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," NBER Working Papers 3760, National Bureau of Economic Research, Inc.
- Campbell, J.Y. & Ammer, J., 1991. "What Moves The Stock And Bond Markets? A Variance Decomposition For Long- Term Asset Returns," Papers 127, Princeton, Department of Economics - Financial Research Center.
- Ammer, John & Campbell, John, 1993. "What Moves the Stock and Bond Markets? A Variance Decomposition for Long-Term Asset Returns," Scholarly Articles 3382857, Harvard University Department of Economics.
- Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-1054, July.
- Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
- Geert Bekaert & Robert J. Hodrick & David Marshall, 1996. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Working Paper Series, Issues in Financial Regulation WP-96-3, Federal Reserve Bank of Chicago.
- Geert Bekaert & Robert J. Hodrick & David A. Marshall, 1996. "On Biases in Tests of the Expecations Hypothesis of the Term Structure Of Interest Rates," NBER Technical Working Papers 0191, National Bureau of Economic Research, Inc.
- Lund, Jesper & Engsted, Tom, 1996. "GMM and present value tests of the C-CAPM: evidence from the Danish, German, Swedish and UK stock markets," Journal of International Money and Finance, Elsevier, vol. 15(4), pages 497-521, August.
- Fama, Eugene F. & Schwert, G. William, 1977. "Asset returns and inflation," Journal of Financial Economics, Elsevier, vol. 5(2), pages 115-146, November.
- Hodrick, Robert J, 1992. "Dividend Yields and Expected Stock Returns: Alternative Procedures for Inference and Measurement," Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 357-386.
- Tom Doan, "undated". "OLSHODRICK: RATS procedure to compute Hodrick standard errors," Statistical Software Components RTS00147, Boston College Department of Economics.
- Lutz Kilian, 1998. "Small-Sample Confidence Intervals For Impulse Response Functions," The Review of Economics and Statistics, MIT Press, vol. 80(2), pages 218-230, May.
- Solnik, Bruno & Solnik, Vincent, 1997. "A multi-country test of the Fisher model for stock returns," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 7(4), pages 289-301, December.
- Barnes, Michelle & Boyd, John H. & Smith, Bruce D., 1999. "Inflation and asset returns," European Economic Review, Elsevier, vol. 43(4-6), pages 737-754, April.
- Boudoukh, Jacob & Richardson, Matthew, 1993. "Stock Returns and Inflation: A Long-Horizon Perspective," American Economic Review, American Economic Association, vol. 83(5), pages 1346-1355, December.
- Gultekin, N Bulent, 1983. " Stock Market Returns and Inflation: Evidence from Other Countries," Journal of Finance, American Finance Association, vol. 38(1), pages 49-65, March.
- Engsted, Tom & Tanggaard, Carsten, 2001. "The Danish stock and bond markets: comovement, return predictability and variance decomposition," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 243-271, July. Full references (including those not matched with items on IDEAS)