Stock returns and inflation risk: Economic versus statistical evidence

A widespread assumption in the economic literature is that an asset is a good hedge against inflation if the Fisher hypothesis holds, that is, if nominal asset returns move in parallel with expected inflation. We propose a new measure for assessing the inflation risk exposure of an asset. This measure reflects the economic influence of inflation rates on asset returns in a context of portfolio optimization and accounts for parameter uncertainty. We show that the economic significance of the influence of expected inflation on stock returns can be substantial, despite a lack of traditional evidence against the Fisher hypothesis.