David M. Harrison, Ph.D.

1
Inflation and Asset Returns

• Nominal Return -
• Real Return -
• During Inflationary Periods
• Example

2
The Fisher Equation

• The Fisher Equation
• How Does Inflation Affect Interest Rates?
• Empirical Evidence

3
Real vs. Nominal Assets

• Real Assets
• Nominal Assets
• Expected vs. Unexpected Inflation
• Expected vs. Actual Returns

4
Inflation and Nominal Asset Returns

• Assume the 1-year nominal rate (r1) is 11.24.
  If Inflation is expected to be 8, what is the
  expected real return?
• If inflation turns out to be 10 (i.e. higher
  than expected
• If inflation turns out to be 6 (i.e., lower than
  expected

5
Inflation and Real Asset Returns

• Ex. Suppose a firm produces 10 widgets/year at
  a cost of C per unit where
• Caveats

6
Stock Returns and Inflation

• Major Findings
• Possible Explanations
• Empirical Evidence