REIT Stock Prices with Inflation Hedging and Illusion

William G. Hardin, Xiaoquan Jiang and Zhonghua Wu

Online First™, 22 June 2010


Employing dividend yield decomposition, this paper explores the inflation illusion and inflation hedging effects on REIT stock prices. Results show that changes in expected inflation explain a large share of the time series variation of the mispricing component of the dividend yield. Also, while both inflation hedging and inflation illusion effects exist for REITs, the inflation illusion effect tends to dominate the hedging effect during the 1980 to 2008 period. These results suggest that investors are unable to quickly reconcile changes in discount rates and dividend growth rates associated with inflation into stock prices. The findings also provide an alternative explanation as to why short-term REIT returns are often negatively related to expected inflation.

Keywords  Stock prices – Inflation illusion – Dividend yield decomposition – REITs

JEL Classifications  G11 – G12 – E31

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