Nominal Contracting Effects on Common Stock Returns: a Multi-Factor Model Approach (Unexpected Inflation).
Date of Award
Doctor of Philosophy (PhD)
This study examines the theoretical and empirical impact of nominal contracting effects on common stock real returns. It develops an arbitrage pricing model which has as its primary factors the market portfolio and expected inflation and unexpected inflation rates. It extends the model to test empirically for the impact of different nominal contracting effects. In particular, it examines the short- and long-term net monetary position effects, the depreciation tax effect, the inventory tax effect and the wage contract effect. A common feature among these effects is that they are nominal contracts whose real values are affected by unexpected inflation. The study differs from previous studies by considering the effect of unexpected inflation beyond that already impounded in the market factor. It covers the period from 1964 through 1983 using quarterly data. The sample is selected from all non regulated firms commonly listed on the 1983 versions of the Compustat Annual Industrial tape and the CRSP tape. Equally weighted and sequentially updated portfolios are formed in order to obtain more stable betas. The methodology is based on French, Ruback and Schwert (1983). The preliminary multifactor model analysis shows that the three factors--the market factor, the expected inflation factor and the unexpected inflation factor--are significant in explaining common stock returns. The cross-sectional analysis between unexpected inflation betas and the nominal contracting effects shows that nominal contracting effects are empirically detectable and are consistent with the theory of inflation wealth transfer. The nominal contracting effects appear to have been undetected in previous research. In further support for the nominal contracting hypothesis, the study performed maturity effect tests. According to these tests, the coefficient of a nominal contracting variable with longer term to maturity is larger (in absolute value) than the coefficient of a nominal contracting variable with shorter term to maturity. In general, the results from the maturity effect tests tend also to support the nominal contracting hypothesis.
Zakkak, Edward Elias, "Nominal Contracting Effects on Common Stock Returns: a Multi-Factor Model Approach (Unexpected Inflation)." (1985). LSU Historical Dissertations and Theses. 4171.