Asset Pricing and Expected Inflation

This paper provides an equilibrium model in which expected real returns on common stocks are negatively related to expected inflation and money growth. It is shown that the fall in real wealth associated with an increase in expected inflation decreases the real rate of interest and the expected real rate of return of the market portfolio. The expected real rate of return of the market portfolio falls less, for a given increase in expected inflation, when the increase in expected inflation is caused by an increase in money growth rather than by a worsening of the investment opportunity set. The model has empirical implications for the effect of a change in expected inflation on the cross-sectional distribution of asset returns and can help to understand why assets whose return covaries positively with expected inflation may have lower expected returns. The model also agrees with explanations advanced by Fama [5] and Geske and Roll [10] for the negative relation between stock returns and inflation.     

Owner-occupied homes,income-producing properties,and REITs as inflation hedges: Empirical findings

New evidence on the correlation patterns of various real estate returns with inflation is presented. Returns on a wide array of real estate, nonresidential as well as residential, are investigated. Stock and bond returns are also analyzed for comparison purposes. Extensive heterogeneity is found in real estate return correlations with inflation. Nonresidential property returns are most strongly positively correlated with inflation, although the appreciation in owner-occupied homes is also positively associated with inflation. However, REIT returns tend to be strongly negatively correlated with inflation. In this respect, they look more like traditional stocks and bonds than any other type of real estate. Finally, new evidence on return correlations with energy prices is also presented. Nonresidential real estate performs best here, too, although no real estate asset fully compensates investors for adverse energy price shocks.     

REITs,real estate,and inflation: Lessons from the gold market

This studyindirectly tests whether equity Real Estate Investment Trusts (REITs) proxy for real estate when examining real estate's inflation hedging ability. The hedging properties of gold, an underlying asset, are compared against those of gold stocks, a securitized form of the asset, and gold is shown to perform well as an inflation hedge, while gold stocks do not. This divergence between an asset and its securitized form suggests caution in drawing conclusions about real estate's ability to hedge inflation from equity REIT studies.     

Inflation and Asset Returns in a Monetary Economy

Postwar U.S. data are characterized by negative correlations between real equity returns and inflation and by positive correlations between real equity returns and money growth. These patterns are closely matched quantitatively by an equilibrium monetary asset pricing model. The model also implies negative correlations between expected asset returns and expected inflation, and it predicts that the inflation-asset return correlation will be more strongly negative when inflation is generated by fluctuations in real economic activity than when it is generated by monetary fluctuations.     

Optimal Asset Abandonment and Replacement: Tax and Inflation Considerations

The tax and inflation effects on the abandonment and replacement policies are examined for capital assets. The tax effect is shown to defer abandonment for some classes of assets while the asset duration is shortened for others depending on the characteristic of the marginal rates of return of extending asset life. Moreover, inflation may increase or decrease the asset duration depending on the rates of inflation growth of asset nominal cash flows and abandonment value and depending on the relative benefit of asset abandonment. In addition, the Fisher hypothesis of constant real returns relative to anticipated inflation is also examined in the case of asset abandonment and replacement. The results derived for a single cycle of replacement carry over to the replacement policy in an infinite cycle of replacement.     

What drives asymmetric dependence structure of asset return comovements?

We examine the determinants of return comovements of three different asset classes and provide critical insights on the key macroeconomic and non-macroeconomic factors which drive the asset return comovements during economic contraction and expansion regimes. We show that amongst the macroeconomic factors, interest rate and inflation have significant effect on the return comovements during the economic contraction regime whilst risk aversion significantly affects the return comovements during the economic expansion regime. The non-macroeconomic factors, output uncertainty, bond illiquidity and depth of recession contribute significantly in explaining the variations of return comovements for all asset pairs during both economic contraction and expansion periods except for real estate-based portfolios. Our results are robust to alternative model specification that uses regime switching MGARCH model.     

Stock return,dividend growth and consumption growth predictability across markets and time: Implications for stock price movement

This paper links variation in the predictive regressions for stock returns, dividend growth and consumption growth to economic and market factors. The nature of these links can reveal whether movement in asset prices occurs primarily through the discount rate or cash flow channel, while they also help explain the reported mixed results for predictability. Variation is examined through cross-sectional regressions across 15 markets and over time using rolling regressions. The cross-sectional and time-varying parameters are regressed against output growth, interest rates and inflation as well as market variables using fixed effects panel as well as both OLS and logit approaches. The key implication for asset pricing is that although movement occurs through both channels, stock return predictability is more dominated by the discount rate channel and consumption growth predictability more so by the cash flow channel. Intuitively, such a difference may arise as investors and households rebalance their asset holdings and consumption at different speeds. There is also some evidence of money illusion through the inflation variable.     

Monetary randomness and investment

This paper develops a neoclassical model in which the behavior of the money supply affects investment by affecting the real distribution of asset returns. Investment depends on wealthholders' demand for capital. A stochastic money growth rule influences portfolio choice by affecting the distribution of the inflation rate. The variance of inflation matters to wealthholders because of the existence of assets with returns that are not indexed to changes in the price level: money and bonds which are contracted in nominal terms. In a rational expectations environment, asset demands will thus be sensitive to the distribution of the money growth rate. Our principle conclusion is that an increase in the variance of the money growth rate lowers investment, which complements Tobin's (1965) result that an increase in the mean stimulates capital accumulation. The paper also represents a step toward incorporating an asset market into a macroeconomic model in a manner which takes account of Lucas' (1976) criticism of econometric policy evaluation. All variables in the model, including asset return distributions, are functions of technology, preferences and the money supply rule. Further, expectations are rational.     

Determinants of asymmetric return comovements of gold and other financial assets

Using conditional time-varying copula models, we characterize the dependence structure of return comovements of gold and other financial assets (stocks, bonds, real estate and oil) during economic expansion and contraction regimes. We also investigate which key macroeconomic and non-macroeconomic variables significantly impact the asset return comovements using a two stage Markov Switching Stochastic Volatility (MSSV) framework. Our results show that the non-macro variables have significant influence on the return comovements. We find that gold is an inappropriate hedge against interest rate changes for real-estate and oil-based portfolios, while for bond portfolios, gold offers a good hedge against inflation uncertainty. We also provide evidence that the “flight to safety” phenomenon is due to the implied volatility of the stock market, rather than the observed stock market uncertainty. Finally, we forecast the asset return comovements and examine their economic significance. We show that a dynamic MSSV model which includes the macroeconomic and non-macroeconomic variables yields superior forecast of future asset return comovements when compared with a multivariate conditional covariance model.     

A Theoretical Analysis of Real Estate Returns

In this paper, we consider two hypotheses for the recent performance of real estate returns. The first is the random event argument that real estate is positively correlated with unanticipated inflation but that structural change in expected returns due to a change in the perceived sensitivity of returns to unanticipated inflation has not taken place. The second is the hedge demand argument that formulates the structural shift hypothesis. The paucity of real estate and other expectations data as well as the general identification problem make it extremely difficult to distinguish between these hypothesis. Our tests consist of estimates of inflation betas for various asset categories overtime as well as estimates of the hedge vector, $S^{-1}C$. Although some support for the hedge argument is found, the results are not strong enough to reject the random event argument and conclude that a decline in the required return on real estate due to a relative increase in inflation beta drove returns during the 1970's.     

Real Stock Returns and Inflation

This paper develops the relation between the real rate of return on the stock market and changes in the price level using a multiperiod economy with production. The observed relation between real ex post stock returns and inflation is shown to be consistent with equilibrium in an economy with rational investors. The relation between expected real returns and expected inflation is shown to depend on the form of the economy's production function and on the form of investor preferences. When the production function exhibits stochastic constant returns to scale, the model explains the negative relation between expected real returns and expected inflation which has frequently been observed in empirical studies.     

The Effect of Bank Credit on Asset Prices: Evidence from the Japanese Real Estate Boom during the 1980s

This paper studies whether bank credit fuels asset prices. Financial deregulation during the 1980s allowed keiretsus to obtain finance publicly and reduce their dependence on banks. Banks that lost these blue-chip customers increased their property lending, and serve as an instrument for the supply of real estate loans. Using this instrument, I find that a 0.01 increase in a prefecture's real estate loans as a share of total loans causes 14–20% higher land inflation compared with other prefectures over the 1981–91 period. The timing of losses of keiretsu customers also coincides with subsequent land inflation in a prefecture.     

The Relationships between Real Estate Price and Expected Financial Asset Risk and Return: Theory and Empirical Evidence

In pricing real estate with indifference pricing approach, market incompleteness is shown to significantly alter the conventional pricing relationships between real estate and financial asset. Specifically, we focus on the pricing implication of market comovement because comovement tends to be stronger in financial crisis when investors are especially sensitive to price declines. We find that real estate price increases with expected financial asset return but only in weak market comovement (i.e., a normal market environment) when investors enjoy diversification benefit. When market comovement is strong, real estate price strictly declines with expected financial asset return. More importantly, contrary to the conventional positive relationship from real option studies, real estate price generally declines with expected financial asset risk. With realistic market parameters, we show that there is a nonlinear relationship between real estate price and financial risk. When the market comovement is strong, real estate price only increases with financial asset risk when the risk is low but eventually declines with the risk when it becomes high. Our cross-country empirical results also show that the relationship between financial market risk and real estate price is non-monotonic, conditional on the degree of market comovement.     

COMMON STOCK RETURNS,EXPECTED INFLATION,AND THE RATIONAL EXPECTATIONS HYPOTHESIS

This paper provides empirical evidence that expected inflation has a cross-sectional impact on common stock returns. The study differs from others in that (a) the relation between stock returns and expected inflation is investigated in a two-factor asset pricing model, where the factors are the return on an equally weighted stock portfolio and the expected rate of inflation; (b) the estimation of the expected rate of inflation is based on the rational expectations hypothesis of Muth; and (c) a non-linear seemingly unrelated regression technique is employed to determine consistent and asymptotically efficient estimates. The joint hypothesis of the two-factor asset pricing model and rational expectations is not rejected in this study. It is found that the return on common stocks is significantly affected by expected inflation. Also stocks whose returns are positively correlated with expected inflation have lower expected returns.     

Stock Market Returns and Inflation: Evidence from Other Countries

This paper investigates the relation between common stock returns and inflation in twenty-six countries for the postwar period. Our results do not support the Fisher Hypothesis, which states that real rates of return on common stocks and expected inflation rates are independent and that nominal stock returns vary in one-to-one correspondence with expected inflation. There is a consistent lack of positive relation between stock returns and inflation in most of the countries.     

Information,interest rates,and the volatility of asset prices

The volatility of an asset price is modelled as a function of the volatility of an information signal, real interest rates and inflation expectations. Volatility depends on the duration of cash flows, and the degree to which cash flows are indexed to real rates and inflation. The model is applied to determine asset betas, the volatility of the futures prices of assets and the volatility of equity prices.     

我国资产价格波动与通货膨胀关系的理论研究与实证分析

随着次贷危机引发全球性金融危机,学术界对于货币政策是否以及如何对资产价格做出反应的争议再起。本文根据协整分析技术、Granger因果检验方法和误差修正模型,利用1998—2008年中国的季度数据,对资产价格与通货膨胀之间的关系进行了实证研究。实证研究表明：第一,我国资产价格与通货膨胀之间确实存在长期的均衡关系,其中房价变动对通货膨胀的影响大于股价变动对通货膨胀的影响;第二,我国资产价格与通货膨胀之间存在着单向的因果关系,即股票价格与房价上涨是通货膨胀的原因。     

Pricing Participating Inflation Retirement Funds Through Option Modeling and Copulas

Abstract

Pension plans and life insurances offering minimum performance guarantees are very common worldwide. In the Brazilian market, the customers of a common type of defined contribution plan have the right to receive, over their savings, the positive difference between the return of a specified investment fund, usually a fixed income fund, and the minimum guaranteed rate, commonly defined as the composition of a fixed interest rate and a floating inflation rate. This instrument can be characterized as an option to exchange one asset, the minimum guaranteed rate, for another, the return of the specified investment fund. In this paper we provide a closed formula to evaluate this liability that depends on two stochastic rates assuming bivariate normality. We also explore the use of copulas for the modeling of the dependence structure and price the options using Monte Carlo simulation to compare the effects of the copula specification in their values. An application with real data is provided. The model makes use of a one-factor Vasicek framework for the term structures of interest rate and inflation rate.     

金融资产危机与FM-IS-LM一般均衡模型

随着金融资产总量的迅速增长,金融资产价格变化对宏观经济的影响日益上升。本文在传统宏观经济理论的基础上,将可交易金融资产置入宏观经济模型之中,建立了FM-IS-LM一般均衡模型,并以此模型对金融资产膨胀、金融资产危机进行了系统化的讨论。这一研究的最重要价值在于把握金融资产膨胀、金融资产危机和实体经济波动的内在联系,提高宏观经济政策的完备性和有效性,避免金融危机在中国再现。     

Inflation Illusion,Expertise and Commercial Real Estate

Data from the National Council of Real Estate Investment Fiduciaries (NCREIF) provide a unique setting to examine the inflation illusion hypothesis. NCREIF provides appraisal-based and transaction-based return series allowing comparison of market participants with specific valuation expertise to general market participants. Results using the appraisal-based indices indicate that the mispricing term is not statistically significantly related to expected inflation, which suggests that commercial valuers do not suffer from inflation illusion. Interestingly, results based on the investor oriented transaction-based indices show that the mispricing term is inversely related to expected inflation and that mispricing plays an important role in determining the long-term discount rate. These results are robust across different empirical specifications, inflation data and subsamples by property type. The comprehensive findings suggest that the inflation illusion effect in direct investment in real estate differs from securitized markets. This study further adds to the general literature regarding the impact of inflation illusion on asset markets by showing that experienced participants may not suffer from inflation illusion which suggests that 1) novice participants may be driving its appearance and 2) experience and training mitigate this bias.