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Inflation uncertainty and excess returns on stocks and banks

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  • Timothy Cogley

Abstract

This paper investigates the relation between inflation uncertainty and excess returns on stocks and bonds. It quantifies the effect of inflation uncertainty by comparing actual excess returns with those expected by a hypothetical naive investor who treats inflation forecasts as if they were known with certainty. The evidence suggests that ignoring inflation uncertainty results in only small pricing errors, on average.

Suggested Citation

  • Timothy Cogley, 1995. "Inflation uncertainty and excess returns on stocks and banks," Economic Review, Federal Reserve Bank of San Francisco, pages 21-29.
    • Handle: RePEc:fip:fedfer:y:1995:p:21-29:n:2
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    References listed on IDEAS

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    1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
    2. Huizinga, John & Mishkin, Frederic S, 1984. "Inflation and Real Interest Rates on Assets with Different Risk Characteristics," Journal of Finance, American Finance Association, vol. 39(3), pages 699-712, July.
    3. Backus, David K. & Gregory, Allan W. & Zin, Stanley E., 1989. "Risk premiums in the term structure : Evidence from artificial economies," Journal of Monetary Economics, Elsevier, vol. 24(3), pages 371-399, November.
    4. Hansen, Lars Peter & Jagannathan, Ravi, 1991. "Implications of Security Market Data for Models of Dynamic Economies," Journal of Political Economy, University of Chicago Press, vol. 99(2), pages 225-262, April.
    5. Evans, Martin, 1991. "Discovering the Link between Inflation Rates and Inflation Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 23(2), pages 169-184, May.
    6. Taylor, John B., 1981. "On the relation between the variability of inflation and the average inflation rate," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 15(1), pages 57-85, January.
    7. Labadie, Pamela, 1989. "Stochastic inflation and the equity premium," Journal of Monetary Economics, Elsevier, vol. 24(2), pages 277-298, September.
    8. Giovannini, Alberto & Labadie, Pamela, 1991. "Asset Prices and Interest Rates in Cash-in-Advance Models," Journal of Political Economy, University of Chicago Press, vol. 99(6), pages 1215-1251, December.
    9. John H. Cochrane & Lars Peter Hansen, 1992. "Asset Pricing Explorations for Macroeconomics," NBER Chapters, in: NBER Macroeconomics Annual 1992, Volume 7, pages 115-182, National Bureau of Economic Research, Inc.
    10. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
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    Cited by:

    1. Mark M. Spiegel, 1998. "Central bank independence and inflation expectations: evidence from British index-linked gilts," Economic Review, Federal Reserve Bank of San Francisco, pages 3-14.

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