Inflation Risk and Capital Market Equilibrium / Zvi Bodie.

Format:

Book

Author/Creator:

Bodie, Zvi.

Contributor:

National Bureau of Economic Research.

Series:

Working Paper Series (National Bureau of Economic Research) no. w0373.

NBER working paper series no. w0373

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1979.

Summary:

This paper investigates the effect of inflation uncertainty on the portfolio behavior of households and the equilibrium structure of capitol market rates. The principal findings regarding portfolio behavior are: (1.) In the presence of inflation uncertainty, households will have an inflation-hedging demand for assets other than riskless nominal bonds, which will be directly proportional to the covariance between the rate of inflation and the nominal rates of return on these other assets. (2.) An asset is a perfect inflation hedge if and only if its nominal return is perfectly correlated with the rate of inflation. The principal findings regarding capital market rates are: (1.) The equilibrium real yield spread between any risky security and riskless nominal bonds is directly proportional to the difference between the covariance of the security's nominal rate of return with the market portfolio and its covariance with the rate of inflation. (2.) As long as the net supply of monetary assets in the economy is greater than zero, an increase in inflation uncertainty will lower the risk premia on all real assets. (3.) A preliminary empirical test of the theory using rates of return on common stocks, long-term bonds, real estate and commodity futures contracts yields mixed results. The risk premia on long-term bonds and futures have the "wrong" signs.

Notes:

Print version record

July 1979.