The Informational Role of Inflation for Real Asset Prices

Project Start:01/2017
Status:Completed
Researchers:Ilya Dergunov, Christoph Meinerding, Christian Schlag
Category: Financial Markets
Funded by:LOEWE

Topic and Objectives

In a parsimonious regime switching model, we find strong evidence that expected consumption growth varies over time. Adding inflation as a second variable, we uncover two states in which expected consumption growth is low, one with high and one with negative expected inflation. Embedded in a general equilibrium asset pricing model with learning, these dynamics replicate the observed time variation in stock return volatilities and stock-bond return correlations. They also provide an alternative derivation for a measure of time-varying disaster risk suggested by Watcher [Wachter J (2013) Can time-varying risk of rare disasters explain aggregate stock market volatility? J. Finance 68(3):987–1035]. implying that both the disaster and the long-run risk paradigm can be extended toward explaining movements in the stock-bond correlation.

Related Published Papers

Author/sTitleYearProgram AreaKeywords
Ilya Dergunov, Christoph Meinerding, Christian SchlagExtreme Inflation and Time-Varying Expected Consumption Growth
forthcoming in Management Science
2023 Financial Markets

Related Working Papers

No.Author/sTitleYearProgram AreaKeywords
334Ilya Dergunov, Christoph Meinerding, Christian SchlagExtreme Inflation and Time-Varying Expected Consumption Growth2022 Financial Markets
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