Working Paper: CEPR ID: DP15947
Authors: Fabio Braggion; Felix von Meyerinck; Nic Schaub
Abstract: We analyze how individual investors respond to inflation. We introduce a unique dataset containing information on local inflation and security portfolios of more than 2,000 clients of a German bank between 1920 and 1924, covering the German hyperinflation. We find that individual investors buy fewer (sell more) stocks when facing higher local inflation. This effect is more pronounced for less sophisticated investors. Moreover, we document a positive relation between local inflation and forgone returns following stock sales. Our findings are consistent with individual investors suffering from money illusion. Alternative explanations, such as consumption needs, are unlikely to drive our results.
Keywords: inflation; investor behavior; money illusion; individual investors; behavioral biases
JEL Codes: D14; E31; G11; G41; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Local inflation (E31) | Buy-sell imbalance (D53) |
| Local inflation (E31) | Investors buy fewer stocks (G19) |
| Local inflation (E31) | Investors sell more stocks (G19) |
| Local inflation (E31) | Forgone returns from stock sales (G17) |
| Money illusion (E41) | Investor decisions (G11) |
| Sophistication (D84) | Weaker negative relationship between inflation and buy-sell imbalances (E31) |