The Informational Role of Inflation for Real Asset Prices
Project Start: | 01/2017 |
Status: | Completed |
Researchers: | Ilya Dergunov, Christoph Meinerding, Christian Schlag |
Area: | 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/s | Title | Year | Area | Keywords |
---|---|---|---|---|
Ilya Dergunov, Christoph Meinerding, Christian Schlag |
Extreme Inflation and Time-Varying Expected Consumption Growth
Management Science |
2023 | Financial Markets | Long-run Risk, Inflation, Recursive Utility, Filtering, Disaster Risk |
Related Working Papers
No. | Author/s | Title | Year | Area | Keywords |
---|---|---|---|---|---|
334 | Ilya Dergunov, Christoph Meinerding, Christian Schlag | Extreme Inflation and Time-Varying Expected Consumption Growth | 2022 | Financial Markets | Long-run Risk, Inflation, Recursive Utility, Filtering, Disaster Risk |