THE IMPACT OF INFLATION
With inflation and inflation expectations rising to the highest levels in forty years, there is a discussion on which sectors and assets can perform better in a high-inflation environment. For this topic, you can test the impact of inflation on:
– companies in different sectors (energy, commodity, discretionary, tech, …) or ETFs targeting different sectors
– firms with high pricing power versus limited pricing power
– different assets (gold price, bond ETF prices, crypto, …)
– Data
stock returns from finance. yahoo.com inflation expectations from Cleveland Fed (https://www.clevelandfed.org/our-research/indicators-and-data/inflation-expectations.aspx). Other macro data from FRED if needed.
You may use the regression model below to analyze data. Requirements for this paper and the brief plan are also attached below. Please note that data®ression sections are essential the data collected should be clear enough and complete in the paper.
Requirements: 15 to 25 pages
Topic:TheImpactofInflationIntroductionI’dliketodelveintoinflationanditspivotalroleineconomicsandfinance.I’veobservedarecentsurgeininflation,andwemustgraspitsimplications.Theprimaryobjectiveofthispaperistoassesstherelationshipbetweeninflationexpectationsandtheperformanceofvarioussectors,firms,andassetclasses.Thiswillhelpusidentifypotentialstrategiesandsafehavensduringheightenedinflation.KeyResearchQuestions:-WhichsectorsorETFs(Energy,Commodity,Discretionary,Tech,etc.)showresilienceorvulnerabilitytoinflationarypressures?-Howdoesinflationimpactfirmswithvaryinglevelsofpricingpower?-Whatroledoesinflationplayinvaluingdiverseassetslikegold,bonds,andcryptocurrencies?I’llbesourcingdataonstockreturnsfromfinance.yahoo.comandanalyzingexpectedtrendsininflation.Forthis,I’llrefertotheClevelandFed’swebsite.Initially,I’llcategorizecompaniesandETFsbytheirsectors,whichwillhelpmeunderstandhoweachindustryresponds.Followingthat,I’lluseregressionmodelstoexaminetheimpactofinflationexpectationsonstockandbondprices,aimingtodiscernanynoticeablepatterns.I’mkeentoidentifywhichsectorsremainstableandwhichbecomevolatileasinflationsurges.Additionally,I’mintriguedtoseehowinflationinfluencesvarioustypesofcompanies,especiallyregardingtheirpricingflexibility.Lastly,Iwanttoobservehowassetslikegold,bonds,andcryptocurrenciesreacttorisinginflationexpectations.
Financial Markets & the MacroeconomyECON 137 W
Some more finance…•CAPM (Capital Asset Pricing Model)
CAPM•Risky assets (stocks), safe assets (3-months treasury bills)•Individuals prefer higher returns, but dislike riskR(t)i–r(t) = βi[R(t)Market–r(t)]•βi equals (cov/var)
CAPM•We will ignore r(t) (it’s close to 0 and roughly constant)R(t)i= βiR(t)Market
•β=1 Neutral stocks•β>1 Aggressive stocks•β<1 Defensive stocks•β< 0 ?•βand Foreign stocks
Expected ReturnCMLMµm-rYσmStandard DeviationBALFigure 1: Market Portfolio
Required return = SML and actual return =SMLAsset’s beta, βiQ (buy)S (sell)Pactual returnexpectedreturn0.511.2T (sell)MSecurities which lie above (below) the SML have a positive (negative) ‘alpha’indicating a positive (negative) ‘abnormal return’, after correcting for ‘beta risk’.rαQ>0αS< 0Figure 2: Security Market Line, SML
CAPM•We add αi: R(t)i= αi+βiR(t)Market•When we use as regression, add error term (this is our final version!)R(t)i= αi+βiR(t)Market+ ε(t)
Market Betas, βi,mMean excess return (%)0.20.40.60.81.01.21.4261014-20Gov. bondsSmallest firmdecileCorporate Bonds0CAPM prediction = line fitted through NYSE value weighted return at AOLS cross-section regressionAFigure 3 : Size Sorted Value Weighted Decile Portfolio (NYSE) : US data, post 1947
Measures of Performance•Sharpe Ratio: (R(i)-r)/σ(i)•Treynor Ratio: (R(i)-r)/β(i) or also α(i)/β(i)•Jensen’s Alpha: α(i)•Useful if you want to do the project on mutual funds performance, for example
ABNORMAL RETURNS•Event studies•Use a model to derive returns in “normal” times•Ex: CAPM, or ‘close’ to CAPM R(t)i= αi+ βiR(t)Market
•ABNORMAL RETURN:•R(t)ABN= R(t)i-R(t)i = = R(t)i –(αi+ βiR(t)Market)What explains the abnormal return?
•Calculate R(t)i = (αi+ βiR(t)Market) from a rather long sample of data, t=1,…,K•Construct series of abnormal returns R(t)ABNfor t=K+1,…,T•Regress abnormal returns on the variable of interest
Final Research Paper
The paper should clearly identify the research question you aim to answer, why it matters, and explain what you do to answer it (what kind of data you use, what techniques you use). Any paper should include an empirical analysis: this means that you should use the econometric techniques that you have learned in previous courses to tackle your question (usually one or more OLS regressions). You should devote a lot of effort in interpreting the results and understanding what they may depend on.
The final paper is typically 10 to 25 pages in length.
EViews:
The final research paper should include an empirical analysis related to a topic of your choice. The easiest way to manage your data set and run regressions is by using EViews, a very user-friendly software package for data analysis, econometrics, and forecasting. If you don’t have EViews, no problem: you can use any other software to run regressions (Stata, R studio, or even Excel).
Textbooks you may use:
• Strunk and White, The Elements of Style
• McCloskey, Economical Writing
•Writing from A to Z
• Williams, Style: Toward Clarity and Grace
• Lanham, Revising Prose
• Booth et al., The Craft of Research
Sample Paper:
• Kenneth French, “Stock returns and the weekend effect.”
• Look at its structure
• Your final paper will have a similar structure.
Paper Structure
a. Title
B. Authors
C. Proposal, 1st draft, 2nd draft, final paper
D. Abstract
—————————
1. Introduction
2. Data
3. Empirical Model (Regression)
4. Discussion of the Results
5. Conclusions
—————————
e. References
f. Tables
g. Figures
• Ex: INTRODUCTION
The “Hook”
What is the question you want to answer in the paper?
Why is it an important question?
What do you do to answer it? (with what kind of data, which techniques,…)
What do you find? [Results]
Are your conclusions plausible? How do your results relate to those described in the readings?
Sample Introductions
•Romer, Endogenous Technological Change
•Mankiw, Romer, Weil, A contribution to the empirics of economic growth
•Kahneman and Tversky, Prospect Theory
•Paul Krugman, Increasing returns and economic geography
•Stiglitz-Weiss, Credit Rationing in Markets with Imperfect Information
(Look at their introductions)
Elementary Principles of Composition
1. Choose a Design (Scheme)
2. Use the Paragraph as the main unit of composition.
Transition (Again, Therefore, For the same reason…)
(Long/Short)
3. Use the ACTIVE Voice (more direct and vigorous)
Ex: NO → Data on stock returns were used
Significant effects were found
There are dead leaves lying on the
Ground vs.Dead leaves cover the ground
There is/There are….
4. Write statements in positive form
Ex: did not remember/ forgot did not pay attention to/ ignore
5. Omit needless words: vigorous writing is concise
A sentence should contain no unnecessary words, no unnecessary sentences: every word should tell.
6. Keep one tense (usually present tense)
7. Place emphatic words of a sentence at the end (usually)
• Avoid words used to intensify statements: certainly, very, important(ly), insightful,…
• Avoid vague words: they add nothing to the sentence fact, factor, feature, hopefully, in regard to, in terms of, personally, respectively, kind (sort) of,…
Common mistakes
•Data (plural, use plural verb)
•That/which (defining/nondefining)
•Between/Among
•Effect/Affect
Random suggestions
• Use of however
• This
• Use simple words when possible: Possess/Utilize vs. Have/Use
• Be specific (ex: “play a critical role”…too vague)
Style
Write in a way that comes naturally
Start from a suitable design
Write with nouns and verbs (not with adjectives and adverbs)
Revise, revise, revise,…
Do not overwrite
Do not overstate
Avoid qualifiers: rather, very, little, pretty
Avoid fancy words
Be CLEAR
Do not inject opinion
McCloskey, Economical Writing
For your paper:
• Write early (“writing is thinking”), The trick is getting a first draft
• Choose an audience
• Avoid prefabricated expressions. Avoid too long introductions.
• Tables/Figures. They should be self-contained. Add explanations.
