Inflation and the Relative Price Premium

Yun Joo An; Fotis Grigoris; Christian Heyerdahl-Larsen; Preetesh Kantak

doi:10.2139/ssrn.4316133

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Inflation and the Relative Price Premium

Working paper

Open access

Inflation and the Relative Price Premium

Yun Joo An, Fotis Grigoris, Christian Heyerdahl-Larsen and Preetesh Kantak

SSRN

01/03/2023

DOI: 10.2139/ssrn.4316133

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https://doi.org/10.2139/ssrn.4316133View

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Abstract

This study shows that relative price dispersion impacts risk premia. Notably, firms associated with goods and services that have increased (decreased) in price relative to the headline inflation rate earn high (low) returns. We refer to this return spread of 0.71% per month as the relative price premium. We rationalize the premium via a consumption-based asset-pricing model in which investors have preferences for the types of goods they consume. Shocks to relative prices induce investors to consume an actual basket of goods that differs from their preferred bundle of goods. Thus, high price dispersion signals bad times for investors

Asset Prices

CPI

Dispersion

Inflation

Relative Prices

Details

Title: Subtitle: Inflation and the Relative Price Premium
Creators: Yun Joo An
Fotis Grigoris
Christian Heyerdahl-Larsen
Preetesh Kantak
Resource Type: Working paper
DOI: 10.2139/ssrn.4316133
Publisher: SSRN
Number of pages: 69 pages
Language: English
Date posted: 01/03/2023
Date updated: 07/25/2023
Academic Unit: Finance
Record Identifier: 9984580317102771

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