Good Inflation, Bad Inflation, and the Pricing of Real Assets

Category: Finance Brown Bag Seminar
When: 23 November 2016
, 02:00
 - 03:00
Where: HoF E.01
Speaker: Ilya Dergunov

Authors: Ilya Dergunov (Goethe University), Christian Schlag (Goethe University), Christoph Meinerding (Goethe University)

Title: Good Inflation, Bad Inflation, and the Pricing of Real Assets

Abstract: Inflation is a source of information relevant for the pricing of real assets like equity. Low consumption growth tends to occur together with either very high or very low inflation. A positive inflation shock can thus be a good or a bad signal for expected real growth, depending on the overall state of the economy. We find that the probability of low expected consumption growth estimated from a Markov chain for consumption growth and inflation is highly correlated with a measure for the likelihood of consumption disasters suggested by \cite{wa/13}. A simple asset pricing model with recursive utility and unobservable states reproduces the time variation in volatilities and correlations of stock and bond returns very well.

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