Capital Gains, Dividend Yields, and Expected Inflation

  • 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.

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