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Title: A Theory of the Nominal Character of Stock Securities

Author(s): Bernard J Dumas and Marcel René Savioz

Publication Date: December 2020

Keyword(s):

Programme Area(s): Financial Economics

Abstract: We construct recursive solutions for, and study the properties of the dynamic equilibrium of an economy with three types of agents: (i) household/investors who supply labor with a finite elasticity, consume a large variety of goods that are not perfect substitutes and trade government bonds; (ii) firms that produce those varieties of goods, receive productivity shocks and set prices in a Calvo manner; (iii) a government that collects an exogenous fiscal surplus and acts mechanically, buying and selling bonds in accordance with a Taylor policy rule based on expected inflation. In this setting we show that stock market returns are much less than one-for-one related to inflation over a one-year holding period, which means that stock securities have a strong nominal character. We also show that their nominal character diminishes as the length of the stock-holding period increases, in accordance with empirical evidence.

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Bibliographic Reference

Dumas, B and Savioz, M. 2020. 'A Theory of the Nominal Character of Stock Securities'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=15507