Industry Returns and the Fisher Effect

Authors

  • JACOB BOUDOUKH,

  • MATTHEW RICHARDSON,

  • ROBERT F. WHITELAW

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    • Boudoukh is from the Stern School of Business, New York University, Richardson is from the Wharton School, University of Pennsylvania, and Whitelaw is from the Stern School of Business, New York University. We would like to thank Pierluigi Balduzzi, David Marshall, participants of the NBER Asset Pricing Program, the discussant Frederic Mishkin, an anonymous referee, and the editor, René Stulz, for helpful comments and suggestions.

ABSTRACT

We investigate the cross-sectional relation between industry-sorted stock returns and expected inflation, and we find that this relation is linked to cyclical movements in industry output. Stock returns of noncyclical industries tend to covary positively with expected inflation, while the reverse holds for cyclical industries. From a theoretical perspective, we describe a model that captures both (i) the cross-sectional variation in these relations across industries, and (ii) the negative and positive relation between stock returns and inflation at short and long horizons, respectively. The model is developed in an economic environment in which the spirit of the Fisher model is preserved.

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