Chapter2022

Inflation and the Stock Market

71 citations0/0 files storedAdvances in logistics, operations, and management science book series

No readable copy stored yet — this record is metadata only.

No open-access location is known for this record yet.

Literature note Cite in a project Citation map

Financial Markets and Investment Strategies Monetary Policy and Economic Impact Financial Analysis and Corporate Governance

Abstract

The stock market suffers from money illusion, discounting real cash flows at nominal discount rates. Subsequent research has also shown that the cross-section of stock returns is impacted differently by inflation. This cross-sectional variance across risky and safe stocks makes one of the most puzzling anomalies, risk (beta) anomaly, stronger in inflationary periods. This chapter tests the hypothesis that higher inflation leads to stronger mispricing of risk in stock market due to money illusion effect in Turkey, one of the emerging countries afflicted with perennial high inflation. The results show that although money illusion and mispricing were not visibly present in hyper-inflationary period in 1990s, the anomalous pricing of risky securities was remarkably high in inflationary periods over the last two decades, with a distinct mispricing due to the inflationary pressure that commenced with the COVID-19 pandemic. These varying results across the vastly different inflation regimes can be explained by rational inattention and impact of past experience of inflation on investment behavior.

Paper brief

Loading…

Cite this work

Citation unavailable for this work.

BibTeX RIS CSL-JSON

No public copy is stored for this record, so only the metadata is cited.

Citations in this library

Citation map →

Stored only when both papers are in the corpus — 71 citations exist upstream.

References

1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1973Risk, Return, and Equilibrium: Empirical Tests 1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]2003Implications of rational inattention 1977Asset returns and inflation 1981Stock Returns, Real Activity, Inflation, and Money 2002Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve 2015Learning from Inflation Experiences *

Explore the map →

Papers that cite the same references — the relational fallback while embeddings are still backfilling.

Imported from OpenAlex (CC0) — nothing here is generated.