Good times, bad times: inflation uncertainty and equity returns

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Acknowledgements

I gratefully acknowledge comments by Lizi Dawes (the Editor), two anonymous referees of this journal as well as Markus Hagedorn, Mathias Hoffmann, and Johannes Scharler. This paper benefitted from the participants at several conferences and seminars. Parts of this research were conducted while the author was at the University of Zurich. The views expressed in this paper are my own and do not necessarily reflect the stance of the Deutsche Bundesbank.

Notes

¹While the effect of inflation uncertainty on bond prices switches sign, it is robustly negative for stock prices over the period 1965–2011.

²See, for instance, Hasbrouck (1984), Zarnowitz and Lambros (1987), Rich et al. (1992), and Wright (2011).

³We conventionally refer to a model with constant coefficients as an unconditional linear factor model.

⁴As noted by Lettau and Ludvigson (2001), a straightforward computation of the risk prices for the fundamental factors is not possible without making further assumptions.

⁵Chapter 12.2 of Cochrane (2005) provides details of this approach.