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Inflation and Individual Investors’ Behavior: Evidence from the German Hyperinflation

Author

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  • Braggion, Fabio
  • von Meyerinck, Felix
  • Schaub, Nic

Abstract

We analyze how individual investors respond to inflation. We introduce a unique dataset containing information on local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the German hyperinflation. We find that individual investors buy fewer (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. Moreover, we document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with individual investors suffering from money illusion. Alternative explanations, such as consumption needs, are unlikely to drive our results.

Suggested Citation

  • Braggion, Fabio & von Meyerinck, Felix & Schaub, Nic, 2021. "Inflation and Individual Investors’ Behavior: Evidence from the German Hyperinflation," CEPR Discussion Papers 15947, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:15947
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    References listed on IDEAS

    as
    1. Brad M. Barber & Terrance Odean, 2008. "All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors," The Review of Financial Studies, Society for Financial Studies, vol. 21(2), pages 785-818, April.
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    More about this item

    Keywords

    inflation; Investor behavior; Money illusion; Individual investors; Behavioral biases;
    All these keywords.

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • N14 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - Europe: 1913-

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