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Expected Inflation, Expected Stock Returns, and Money Illusion: What can we learn from Survey Expectations?

  • Maik Schmeling
  • Andreas Schrimpf

We show empirically that survey-based measures of expected inflation are significant and strong predictors of future aggregate stock returns in several industrialized countries both in-sample and out-of-sample. By empirically discriminating between competing sources of this return predictability by virtue of a comprehensive set of expectations data, we find that money illusion seems to be the driving force behind our results. Another popular hypothesis - inflation as a proxy for aggregate risk aversion - is not supported by the data.

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File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2008-036.pdf
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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-036.

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Length: 41 pages
Date of creation: May 2008
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Handle: RePEc:hum:wpaper:sfb649dp2008-036
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