Working Paper: NBER ID: w30692
Authors: Stefan Nagel; Zhen Yan
Abstract: Households participating in financial markets pay attention to inflation news when making their investment decisions, even in an environment of mostly low and stable inflation. ETFs and open-ended mutual funds holding Treasury Inflation-Protected Securities (TIPS) receive inflows from retail investors, and nominal Treasury ETF experience outflows, when long-horizon market-based inflation expectations measures increase. Changes in household survey expectations or in measures of inflation uncertainty do not contribute much in explaining retail TIPS fund flows. Retail flows into TIPS funds are asymmetric, with strong reactions only to positive inflation news, and sticky, with flow responses to news gradually playing out over several months. Retail investors appear to pay some attention to regular Federal Reserve announcements, but major events such as the ``taper tantrum'' in May 2013, the presidential election in November 2016, and the COVID-19 crisis in March 2020 are associated with particularly large retail TIPS fund flows.
Keywords: inflation; TIPS; retail investment; fund flows; inflation expectations
JEL Codes: E31; G23; G5
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| inflation uncertainty (E31) | retail flows into TIPS ETFs (G12) |
| inflationary news (E31) | retail flows into TIPS ETFs (G12) |
| disinflationary news (E31) | retail flows into TIPS ETFs (G12) |
| long-horizon market-based inflation expectations (E31) | retail flows into TIPS ETFs (G12) |
| negative change in long-horizon market-based inflation expectations (E31) | retail flows into TIPS ETFs (G12) |
| market-based inflation expectations (E31) | retail flows into TIPS ETFs (G12) |
| retail flows (L81) | past returns of TIPS ETFs (G12) |