Year: 2025
Type: article
Abstract: We study investors’ perceptions of inflation through the lens of a high-frequency event study, documenting they have a stagflationary view of the world. In response to higher-than-expected inflation, investors expect firms’ nominal cash flows to remain stagnant while discount rates increase, resulting in lower stock prices. Both the equity risk premium and nominal risk-free yields rise, but longer-term real yields remain unchanged. Consistent with investors interpreting inflation as a cost shock, investors expect firms with low market power to suffer larger declines in cash flows. Cash flow expectations of equity investors are aligned with those of professional earnings analysts.
Authors: Benjamin Knox, Yannick Timmer
Institutions: Federal Reserve, Federal Reserve Board of Governors
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4413031125