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

Author

Listed:
  • Fabio Braggion
  • Felix von
  • Nic Schaub
  • Tarun Ramadorai

Abstract

We analyze how individual investors respond to inflation. We introduce a unique data set 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.Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online

Suggested Citation

  • Fabio Braggion & Felix von & Nic Schaub & Tarun Ramadorai, 2023. "Inflation and Individual Investors’ Behavior: Evidence from the German Hyperinflation," The Review of Financial Studies, Society for Financial Studies, vol. 36(12), pages 5012-5045.
    • Handle: RePEc:oup:rfinst:v:36:y:2023:i:12:p:5012-5045.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhad047
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    Citations

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    Cited by:

    1. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Inflation and trading," CFS Working Paper Series 727, Center for Financial Studies (CFS).
    2. Lehmann-Hasemeyer Sibylle & Opitz Alexander, 2024. "Data Sources on the 19th and Early 20th Century German Capital Market: Challenges and Opportunities," German Economic Review, De Gruyter, vol. 25(4), pages 371-391.
    3. Schnorpfeil, Philip & Weber, Michael & Hackethal, Andreas, 2024. "Households' response to the wealth effects of inflation," CFS Working Paper Series 728, Center for Financial Studies (CFS).
    4. Philip Schnorpfeil & Michael Weber & Andreas Hackethal & Michael Weber, 2024. "Inflation and Trading," CESifo Working Paper Series 11580, CESifo.

    More about this item

    Keywords

    D14; E31; G11; G41; N14;
    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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