IDEAS home Printed from https://ideas.repec.org/a/eee/jimfin/v147y2024ics0261560624001360.html
   My bibliography  Save this article

Prices and returns: Role of inflation

Author

Listed:
  • Sun, Yulong

Abstract

We find that the market dividend yield and earnings yield can positively predict future inflation internationally. The inflation predictability of price ratios could invert the standard asset pricing predictive results. For example, dividend yields do forecast real dividend growth but not nominal dividend growth. We extend the analysis to the earnings yield as a robust analysis and document a similar predictive pattern. Further term structure analysis suggests that the financial ratio variation decomposition also differs significantly in nominal and real terms. In nominal-term decomposition, discount rate news is found to be the primary contributor to variations in price ratios while in real-term decomposition, cash flow news plays a more significant role, with its importance increasing over longer investment horizons. Our study utilizes consistent inflation predictability evidence in advanced economies to re-evaluate the global relationship between price ratios and inflation. We confirm that inflation is an international state variable in post-1970s samples and that the correlation between inflation and price ratios can almost entirely be attributed to the relationship between expected inflation and future growth prospects. This finding offers an explanation for the previously puzzling correlation between the dividend-price ratio and future inflation.

Suggested Citation

  • Sun, Yulong, 2024. "Prices and returns: Role of inflation," Journal of International Money and Finance, Elsevier, vol. 147(C).
  • Handle: RePEc:eee:jimfin:v:147:y:2024:i:c:s0261560624001360
    DOI: 10.1016/j.jimonfin.2024.103149
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0261560624001360
    Download Restriction: Full text for ScienceDirect subscribers only

    File URL: https://libkey.io/10.1016/j.jimonfin.2024.103149?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jimfin:v:147:y:2024:i:c:s0261560624001360. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30443 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.