The Stock Return-Inflation Puzzle at Long Horizons

Abstract

We investigate the empirical long-horizon relationship between market returns and infiation in the United States. Conventional tests for long horizon predictability may reject the null too frequently when the predictor variable is highly persistent and endogenous and there are overlapping observations. We use a recently developed econometric technique designed to overcome these problems. We use data from the Survey of Professional Forecasters and from the Treasury I nfiation Protected Security Securities market to model expected infiation. We conduct extensive examination across a broad spectrum of time horizons, and find no evidence that standard securities are able to hedge infiation.