Sorting out inflation



We sort stocks according to their beta with respect to unexpected inflation and find that this macroeconomic risk is priced. Our cross-sectional regressions estimate an inflation risk premium of 5% per year pre-2004 and -7% post-2003. We hypothesize that the reversal is driven by the introduction of TIPS and the surge in commodity index investments by institutions. Our results indicate that the unexpected inflation factor is separate to the market, size, and book-to-market factors, while a substantial part is captured by the momentum factor. The inflation risk premium is time-varying and realized almost completely in recessions, when the investor's need to hedge is strongest.
Contact information:
Sebastian Gryglewicz
The Brown Bag Seminars are sponsored by ERIM.