Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

Michael Katz
AQR Capital Management

Hanno Lustig
Stanford GSB and NBER

Lars Nielsen
AQR Capital Management

March 2016

Abstract

Local stock markets adjust sluggishly to changes in local inflation. When the local rate of inflation increases, local investors subsequently earn signifcantly lower real returns on local stocks, but not on local bonds or foreign stocks. We argue that local stock market investors use sticky long-run nominal discount rates that are too low when inflation increases, because they are slow to update inflation expectations in response to news, consistent with Mankiw and Reis' (2002) model of sticky information. Provided that in ation is suciently persistent,small amounts of stickiness in inflation expectations suce to match the real stock return predictability induced by inflation in the data.

Keywords: Inflation, Hedging, Inflation Expectations, Sticky Information.