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Fotis Grigoris – Kelley (Indiana) – Brown Bag Series
26 October 2022 @ 1:30 pm - 2:30 pm
Inflation and the Relative Price Premium
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.