Time: Tuesday, 21/May/2024: 9:30am - 10:15am Session Chair: Erik Loualiche, University of Minnesota Discussant: Isha Agarwal, University of British Columbia |
Location: Room 601 |
Stagflationary Stock Returns
Federal Reserve Board
We study the inflation implications for firms across the market power distribution
from an asset pricing perspective. Inflationary surprises are associated with
persistent declines in stock returns. We propose a new decomposition of the present
value identity of stock prices and show that investors expect nominal cashflows to
remain stagnant during periods of higher-than-expected inflation, a stagflationary
view of the world, on average, while a rising equity risk premium reduces stock
prices. Real yields do not increase in response to inflationary news, inconsistent
with a Taylor-rule type monetary policy-driven stock price response. Firms with a
large degree of market power are shielded from the negative returns following inflation
surprises, as market power firms are expected to generate a relative increase
in their nominal cashflows in response to inflation shocks. Changes in analysts’
firm-level earnings expectations around inflationary surprises confirm these results.
Timmer-Stagflationary Stock Returns-520.pdf |