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Inflation Hedging and Industry Stock Returns

Tai David Yi

The BRC Academy Journal of Business

Volume 7

Number 1

Print ISSN: 2152-8721 Online ISSN: 2152-873X

Date: March 15, 2017

First Page 1

Last Page 22

DOI: http://dx.doi.org/10.15239/j.brcacadjb.2017.07.01.ja01

Abstract

We examine an inflation-hedging ability of stock returns, using cyclical and non-cyclical industries from 1961Q2 to 2014Q4. We document that the returns of the non-cyclical industry portfolio are positively associated with expected inflation. A sub-period analysis shows that the relation is stronger during the bull market period of 1983Q1-2001Q4. Given the empirical findings of the influence of expected and unexpected inflation on the market-tobook (M/B), return on assets (ROA), and leverage ratios, we test and support validity of the Fisher effect for both cyclical and noncyclical industry portfolios over the entire period. In addition, using the Fama-French three factor model, we examine whether the excess stock return is further explained by expected inflation.

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