TY  - JOUR
AU  - Campbell,John Y.
AU  - Vuolteenaho,Tuomo
TI  - Inflation Illusion and Stock Prices
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10263
PY  - 2004
Y2  - February 2004
UR  - http://www.nber.org/papers/w10263
L1  - http://www.nber.org/papers/w10263.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Tuomo Vuolteenaho
Arrowstreet Capital
200 Clarendon Street #30
Boston, MA 02116-5021
Tel: 617/496-6284
Fax: 617/495-8570
E-Mail: tvuolteenaho@arrowstreetcapital.com
M1  - published as Campbell, John Y. and Tuomo Vuolteenaho. "Inflation Illusion And Stock Prices," American Economic Review, 2004, v94(2,May), 19-23.
AB  - We empirically decompose the S&P 500's dividend yield into (1) a rational forecast of long-run real dividend growth, (2) the subjectively expected risk premium, and (3) residual mispricing attributed to the market's forecast of dividend growth deviating from the rational forecast. Modigliani and Cohn's (1979) hypothesis and the persistent use of the  Fed model' by Wall Street suggest that the stock market incorrectly extrapolates past nominal growth rates without taking into account the impact of time-varying inflation. Consistent with the Modigliani-Cohn hypothesis, we find that the level of inflation explains almost 80% of the time-series variation in stock-market mispricing.
ER  -