Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

Topics - Equities

${ numberSection } ${ text }
Are Stocks Real Assets? Sticky Discount Rates in Stock Markets

Local stock market investors seem slow to adjust nominal discount rates in response to news about the path of future local inflation. The authors document two symptoms of nominal discount rate stickiness in stock markets.

First, over short horizons — those of less than one year — the nominal returns on a country's value-weighted stock market index do not increase after a country-specific increase in past inflation. As a result, country-specific inflation lowers local real stock returns roughly by the deviation of that country's rate of inflation from the global average.

Second, over the same horizons, local stock returns do not respond contemporaneously to country-specific inflation surprises either. As a result, local investors in the local stock market tend to earn low real returns as the local economy transitions from a low- to a high-inflation equilibrium. While sticky prices in product markets can explain incomplete pass-through of surprise inflation to nominal stock returns, it cannot account for incomplete pass-through of expected inflation.

The pass-through of local inflation to nominal discount rates used by local stock market investors is slow and incomplete, but there is no evidence of nominal stickiness in T-bill and bond markets after changes in inflation. The nominal returns on local short-term and long-term government bonds respond immediately after changes in inflation. So do exchange rates. As a result, an increase in the local rate of expected inflation shrinks the local equity premium over bills and bonds, but not the equity premium on a basket of foreign stocks, because the local currency depreciates.

Published In

Review of Financial Studies

AQR Capital Management, LLC, (“AQR”) provide links to third-party websites only as a convenience, and the inclusion of such links does not imply any endorsement, approval, investigation, verification or monitoring by us of any content or information contained within or accessible from the linked sites. If you choose to visit the linked sites, you do so at your own risk, and you will be subject to such sites' terms of use and privacy policies, over which AQR.com has no control. In no event will AQR be responsible for any information or content within the linked sites or your use of the linked sites.

The information contained herein is only as current as of the date indicated, and may be superseded by subsequent market events or for other reasons. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of AQR Capital Management, LLC, its affiliates or its employees. This information is not intended to, and does not relate specifically to any investment strategy or product that AQR offers. It is being provided merely to provide a framework to assist in the implementation of an investor’s own analysis and an investor’s own view on the topic discussed herein. Past performance is not a guarantee of future results.


Hypothetical performance results have many inherent limitations, some of which, but not all, are described herein. The hypothetical performance shown was derived from the retroactive application of a model developed with the benefit of hindsight.  Hypothetical performance results are presented for illustrative purposes only.


Diversification does not eliminate the risk of experiencing investment loss.


Certain publications may have been written prior to the author being an employee of AQR.

This material is intended for informational purposes only and should not be construed as legal or tax advice, nor is it intended to replace the advice of a qualified attorney or tax advisor.


AQR Capital Management is a global investment management firm, which may or may not apply similar investment techniques or methods of analysis as described herein. The views expressed here are those of the authors and not necessarily those of AQR.