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Interest and Inflation Risk: Investor Behavior
María de la O González1, Francisco Jareño1, Frank S Skinner2
1Department of Economic Analysis and Finance, University of Castilla-La Mancha Albacete, Spain.
Frontiers in Psychology
|April 6, 2016
Summary
This study reveals how investor behavior is affected by interest and inflation risks. Some industries offer a safe haven from these risks, but gold is not a reliable inflation hedge.
Area of Science:
- Economics
- Finance
Background:
- Understanding investor behavior is crucial for financial markets.
- Interest rates and inflation significantly impact investment decisions and asset returns.
Purpose of the Study:
- To analyze the relationship between stock returns and unexpected changes in interest rates and inflation.
- To investigate how these relationships vary across different industries and economic conditions (expansion/contraction).
Main Methods:
- Empirical analysis of US stock market data.
- Examination of stock returns against unexpected nominal and real interest rate changes and inflation.
- Industry-level and sub-sector analysis, considering economic cycles.
Main Results:
- Most industry-level relationships between stock returns and interest/inflation risk are negative.
- Certain industries exhibit a consistently positive relationship, acting as potential safe havens.
- Gold shows an insignificant beta during recessions but a negative correlation with inflation.
Conclusions:
- Specific industries can serve as safe havens against interest rate and inflation volatility.
- Gold's role as a safe haven during recessions is supported, but its effectiveness as an inflation hedge is questionable.
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