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Real Stock Returns and Inflation
Author(s) -
DAY THEODORE E.
Publication year - 1984
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/j.1540-6261.1984.tb02322.x
Subject(s) - economics , stock (firearms) , returns to scale , inflation (cosmology) , stock market , econometrics , real interest rate , financial economics , rational expectations , monetary economics , production (economics) , interest rate , microeconomics , mechanical engineering , paleontology , physics , horse , theoretical physics , engineering , biology
ABSTRACT 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.