Article ID Journal Published Year Pages File Type
7362487 Journal of Financial Markets 2018 55 Pages PDF
Abstract
We document a negative relation between inflation and aggregate equity mutual fund flows and hypothesize that this relation is partly due to inflation illusion on the part of investors. Inflation illusion occurs when investors fail to incorporate the effect of inflation into their estimates of nominal growth rates. Consequently, they lower their estimates of the intrinsic values of stocks and move their assets away from equities. Our results are robust to controls for alternative explanations such as inflation proxying for poorer future real cash flow growth and periods of higher inflation being associated with higher equity risk premia.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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