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Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

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Listed:
  • Katz, Michael

    (AQR Capital Management)

  • Lustig, Hanno

    (Stanford University)

  • Nielsen, Lars

    (AQR Capital Management)

Abstract

Local stock markets adjust sluggishly to changes in local inflation. When the local rate of inflation increases, local investors subsequently earn significantly lower real returns on local stocks, but not on local bonds or foreign stocks. Our findings are consistent with local stock market investors using sticky long-run nominal discount rates that are too low when inflation increases, because they are slow to update the inflation expectations in discount rates in response to aggregate inflation news. Small amounts of stickiness in inflation expectations suffice to match the real stock return predictability induced by inflation in the data. We also consider other explanations, such as nominal cash flow extrapolation.

Suggested Citation

  • Katz, Michael & Lustig, Hanno & Nielsen, Lars, 2015. "Are Stocks Real Assets? Sticky Discount Rates in Stock Markets," Research Papers 3413, Stanford University, Graduate School of Business.
    • Handle: RePEc:ecl:stabus:3413
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    File URL: http://www.gsb.stanford.edu/gsb-cmis/gsb-cmis-download-auth/415346
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    Cited by:

    1. Andreas Neuhierl & Michael Weber & Michael Weber, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," CESifo Working Paper Series 6199, CESifo.
    2. Andreas Neuhierl & Michael Weber, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," NBER Working Papers 22831, National Bureau of Economic Research, Inc.

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