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Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation


Von Meyerinck, Felix; Braggion, Fabio; Schaub, Nic (2022). Inflation and Individual Investors' Behavior: Evidence from the German Hyperinflation. University of St.Gallen - School of Finance Research Paper 2021/07, University of Zurich.

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 less (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.

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 less (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.

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Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Scope:Discipline-based scholarship (basic research)
Language:English
Date:3 July 2022
Deposited On:04 Aug 2023 06:31
Last Modified:06 Mar 2024 14:37
Series Name:University of St.Gallen - School of Finance Research Paper
OA Status:Closed
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.3802488
Related URLs:https://www.zora.uzh.ch/id/eprint/235833/
https://doi.org/10.1093/rfs/hhad047
Other Identification Number:merlin-id:22684