Get access
Advertisement

Real Stock Returns and Inflation

Authors

  • THEODORE E. DAY

    Search for more papers by this author
    • Owen Graduate School of Management, Vanderbilt University. I would like to thank Doug Breeden, Robert Litzenberger, and Hans Stoll for helpful comments. Financial support of the Dean's Fund for Faculty Research at the Owen Graduate School of Management is gratefully acknowledged.


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.

Get access to the full text of this article

Ancillary