Title
Inflation illusion and stock returns
Document Type
Article
Department or Administrative Unit
Finance and Supply Chain Management
Publication Date
1-2016
Abstract
A large sensitivity of stocks' earnings yield to inflation suggests that the value of these stocks is highly influenced by inflation illusion. We construct an inflation illusion factor by buying stocks with large earnings yield sensitivities on inflation and selling stocks with small earnings yield sensitivities on inflation. This factor has a return of approximately 5% per year and is priced in the cross sectional asset returns. Low asset growth stocks have greater exposure to the inflation illusion factor than their counterparts, and they are also underpriced at times of high inflation. Our results are robust for a number of controls.
Recommended Citation
Brown, W. O., Huang, D., & Wang, F. (2016). Inflation illusion and stock returns. Journal of Empirical Finance, 35, 14–24. https://doi.org/10.1016/j.jempfin.2015.11.001
Journal
Journal of Empirical Finance
Rights
Copyright © 2015 Elsevier B.V. All rights reserved.
Comments
This article was originally published in Journal of Empirical Finance. The full-text article from the publisher can be found here.
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