Inflation illusion and stock prices
By: John Y. Campbell, Tuomo Vuolteenaho.
Contributors: Vuolteenaho, Tuomo.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10263; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10263.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Stocks -- Prices -- Econometric models.; Inflation (Finance) -- Econometric models.
Description: "We empirically decompose the S&P 500's dividend yield into (1) a rational forecast of long-run real dividend growth, (2) the subjectively expected risk premium, and (3) residual mispricing attributed to the market's forecast of dividend growth deviating from the rational forecast.  Modigliani and Cohn's (1979) hypothesis and the persistent use of the Fed model' by Wall Street suggest that the stock market incorrectly extrapolates past nominal growth rates without taking into account the impact of time-varying inflation.  Consistent with the Modigliani-Cohn hypothesis, we find that the level of inflation explains almost 80% of the time-series variation in stock-market mispricing"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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