Capital Gains, Dividend Yields, and Expected Inflation
- Abstract
- Full Text PDF
- Author(s): Eugene A. Pilotte
- Published: Feb 12, 2003
- Pages: 447-466
- DOI: 10.1111/1540-6261.00530
One explanation for the negative relationship between short‐horizon stock returns and inflation is that inflation proxies (inversely) for expected future real output. In this paper, I examine the possibility that inflation also proxies for variation in real price/dividend ratios (excess returns). I show that when the covariance between real price/dividend ratios and inflation is nonzero, the relationship between returns and expected inflation differs for the two components of returns: dividend yields and capital gains returns. My empirical evidence demonstrates that dividend yields and capital gains are related differently to expected inflation in U.S. and foreign markets.