Menu Expand

Cite JOURNAL ARTICLE

Style

Moosa, S. Stock Market Growth Expectations, Risk Perceptions, and Ex-Ante Returns Under Uncertain Stagflation. Credit and Capital Markets – Kredit und Kapital, 20(3), 335-357. https://doi.org/10.3790/ccm.20.3.335
Moosa, Suleman A. "Stock Market Growth Expectations, Risk Perceptions, and Ex-Ante Returns Under Uncertain Stagflation" Credit and Capital Markets – Kredit und Kapital 20.3, 1987, 335-357. https://doi.org/10.3790/ccm.20.3.335
Moosa, Suleman A. (1987): Stock Market Growth Expectations, Risk Perceptions, and Ex-Ante Returns Under Uncertain Stagflation, in: Credit and Capital Markets – Kredit und Kapital, vol. 20, iss. 3, 335-357, [online] https://doi.org/10.3790/ccm.20.3.335

Format

Stock Market Growth Expectations, Risk Perceptions, and Ex-Ante Returns Under Uncertain Stagflation

Moosa, Suleman A.

Credit and Capital Markets – Kredit und Kapital, Vol. 20 (1987), Iss. 3 : pp. 335–357

Additional Information

Article Details

Author Details

Suleman A. Moosa, Chico / California

References

  1. Auerbach, A. J.: "Corporate Taxation in the United States", Brookings Papers on Economic Activity, 2: 1983.  Google Scholar
  2. Azariadis, C.: "Implicit Contracts and Underemployment Equilibria", Journal of Political Economy, 83, December 1975, 1183 - 1202.  Google Scholar
  3. Azariadis, C.: "A Re-examination of Natural Rate Theory", University of Pennsylvania, Discussion Paper No. 386, 1977.  Google Scholar
  4. Baumol, W.: "The Transactions Demand for Cash: An Inventory Theoretic Approach", Quarterly Journal of Economics, LXV, November 1952.  Google Scholar

Abstract

Stock Market Growth Expectations, Risk Perceptions, and Ex-Ante Returns Under Uncertain Stagflation

The empirical issues addressed in this study are centered around the estimate of a statistically significant strong negative relationship between inflation and shareholder earnings growth expectations, and around the estimate of a statistically significant negative coefficient of less than unity of the dividend yield on shareholder earnings growth expectations. The latter implies that these increases in inflation nonneutral growth expectations produced fractional increases in equity capitalization rates, thus tending to dampen growth-induced fluctuations in common stock prices. A simultaneous examination of the nature of the empirical relation between monetary growth, inflation and earnings growth on the one hand, and of the stochastic nature of their respective time series on the other, provides us with some insights into the likely nature of the process influencing inflation, interest rate, and earnings growth expectations, as well as that shaping risk perceptions and capitalization rates. If increases in monetary growth are perceived to produce, with some lag, increases in earnings growth, as well as increases in the inflation rate with an even further lag, then the Fisher effect implies an increase in market interest rates and equity capitalization rates. The combination. of our findings of inflation-related declines in real earnings growth and of growth-related fractional declines in real equity yields provides us with a rational explanation for the depressed state of the stock market over the post- 1955 period of generally accelerating inflation. The policy implication that emerges from our analysis is that non-inflationary economic policies also have to be more stable. Such policies can be expected to reduce the inflation-induced changes in risk premia and its associated negative real effects, thereby increasing equity values and stimulating capital formation.