Do stock returns hedge inflation at long horizons?

ABSTRACT

We investigate the long-horizon relationship between market returns and inflation in the United States. Conventional tests for long horizon predictability may reject the null too frequently when the predictor variable is highly persistent and endogenous and there are overlapping observations. We use a recently developed econometric technique designed to overcome these problems. We find little to no evidence that securities are able to hedge inflation.

KEYWORDS:

• Stock returns
• inflation
• fisher equation

JEL CLASSIFICATION:

• C53
• E31
• G12

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ This is part of a larger project where we compute multiple time horizons from 1 year to 5 years to 10. Here, we report only the long horizon (10 year) results.