+7 495 989 9610, 9am6pm (GMT+3), Monday – Friday
ИД «Финансы и кредит»






Digest Finance

The estimation of inflation-adjusted earnings to stock value ratio

Vol. 26, Iss. 1, MARCH 2021

PDF  Article PDF Version

Received: 25 January 2021

Received in revised form: 12 February 2021

Accepted: 26 February 2021

Available online: 30 March 2021


JEL Classification: C51, E31, G12, G17

Pages: 53–66


Subject. The study discusses the dependence of estimates of the fundamental stock value (based on the earnings-price ratio) on the expected inflation.
Objectives. I determine the type and parameters of such dependence.
Methods. The research is based on methods for estimating the stock value and regression analysis to define the parameters of the suggested model.
Results. For the US stock market (S&P 500 index), it is shown that earnings-price ratio for the earnings averaged over 10 years has a significant positive correlation with the indicator chosen to characterize the expected inflation. It is substantiated that the main reason is the impact of the expected inflation on the real determinants of the fundamental value, primarily on the risk premium. Conditions are formulated under which Gordon's formula can be used to determine the type of relationship between the fundamental stock value and its determinants for a time series of observations with a changing real discount rate.
Conclusions. The model is suggested for estimating the fundamental stock value based on the linear relationship between the earnings-price ratio and inflation., and its parameters are determined. The adequacy of the model is confirmed empirically for the US stock market. The findings can complement investor’s decision-making methods in the stock market.

Keywords: stock market, Earnings-price ratio, Risk premium, Inflation, Stock value, Gordon model


  1. Ball R. Anomalies in Relationships between Securities’ Yields and Yield Surrogates. Journal of Financial Economics, 1978, vol. 6, no. 2-3, pp. 103–126. URL: Link90026-0
  2. Ball R., Gerakos J., Linnainmaa J.T., Nikolaev V. Earnings, Retained Earnings, and Book-to-Market in the Cross Section of Expected Returns. Journal of Financial Economics, 2020, vol. 135, iss. 1, pp. 231–254. URL: Link
  3. Campbell J.Y., Shiller R.J. Stock Prices, Earnings, and Expected Dividends. The Journal of Finance, 1988, vol. 43, iss. 3, pp. 661–676. URL: Link
  4. Campbell J.Y., Shiller R.J. The Dividend-Price Ratio and Expectations of Future Dividends and Discount Factors. The Review of Financial Studies, 1989, vol. 1, iss. 3, pp. 195–228. URL: Link
  5. Campbell J.Y., Shiller R.J. Valuation Ratios and the Long-Run Stock Market Outlook. Journal of Portfolio Management, 1998, vol. 24, no. 2, pp. 11–26. URL: Link
  6. Fama E. F., French K.R. Dividend Yields and Expected Stock Returns. Journal of Financial Economics, 1988, vol. 22, no. 1, pp. 3–25. URL: Link90020-7
  7. Modigliani F., Cohn R.A. Inflation, Rational Valuation and the Market. Financial Analysts Journal, 1979, vol. 35, iss. 2, pp. 24–44. URL: Link
  8. Ritter J.R., Warr R.S. The Decline of Inflation and the Bull Market of 1982–1999. Journal of Financial and Quantitative Analysis, 2002, vol. 37, no. 1, pp. 29–61. URL: Link
  9. Campbell J.Y., Vuolteenaho T. Inflation Illusion and Stock Prices. The American Economic Review, 2004, vol. 94, no. 2, pp. 19–23. URL: Link
  10. Asness C.S. Fight the Fed Model. Journal of Portfolio Management, 2003, vol. 30, iss. 1, pp. 11–24. URL: Link
  11. Malkiel B.G. Models of Stock Market Predictability. The Journal of Financial Research, 2004, vol. 27, iss. 4, pp. 449–459. URL: Link
  12. Durre A., Giot P. An International Analysis of Earnings, Stock Prices and Bond Yields. Journal of Business Finance & Accounting, 2007, vol. 34, iss. 3-4, pp. 613–641. URL: Link
  13. Aubert S., Giot P. An International Test of the Fed Model. Journal of Asset Management, 2007, vol. 8, iss. 2, pp. 86–100. URL: Link
  14. Bekaert G., Engstrom E. Inflation and the Stock Market: Understanding the ‘‘Fed Model’’. Journal of Monetary Economics, 2010, vol. 57, iss. 3, pp. 278–294. URL: Link
  15. Peavy J.W. III, Goodman D.A. How Inflation, Risk and Corporate Profitability Affect Common Stock Returns. Financial Analysts Journal, 1985, vol. 41, iss. 5, pp. 59–65. URL: Link
  16. Sharpe S.A. Reexamining Stock Valuation And Inflation: The Implications of Analysts’ Earnings Forecasts. The Review of Economics and Statistics, 2002, vol. 84, iss. 4, pp. 632–648. URL: Link
  17. Boucher C. Stock Prices, Inflation and Stock Returns Predictability. Revue de l'association française de finance, 2006, vol. 27, no. 2, pp. 71–101. URL: Link
  18. Linter J. Inflation and Security Returns. The Journal of Finance, 1975, vol. 30, no. 2, pp. 259–280. URL: Link
  19. Nelson C.R. Inflation and Rates of Return on Common Stocks. The Journal of Finance, 1976, vol. XXXI, no. 2, pp. 471–483. URL: Link
  20. Fama E.F., Schwert W.O. Asset Returns and Inflation. Journal of Financial Economics, 1977, vol. 5, iss. 2, pp. 115–146. URL: Link90014-9
  21. Fama E.F. Stock Returns, Real Activity, Inflation, and Money. The American Economic Review, 1981, vol. 71, no. 4, pp. 545–565. URL: Link
  22. Hu X., Willett T.D. The Variability of Inflation and Real Stock Returns. Applied Financial Economies, 2000, vol. 10, iss. 6, pp. 655–665. URL: Link
  23. Fisher I. The Theory of Interest as Determined by Impatience to Spend Income and Opportunity to Invest it. New York, The Macmillan Company, 1930, 566 p.
  24. Arnott R. D., Bernstein P.L. What Risk Premium Is "Normal"? Financial Analysts Journal, 2002, vol. 58, iss. 2, pp. 64–85. URL: Link
  25. Friedman M. Nobel Lecture: Inflation and Unemployment. The Journal of Political Economy, 1977, vol. 85, no. 3, pp. 451–472. URL: Link
  26. Malkiel B.G. The Capital Formation Problem in the United States. The Journal of Finance, 1979, vol. 34, no. 2, pp. 291–306. URL: Link
  27. Ball L. Why Does High Inflation Raise Inflation Uncertainty? Journal of Monetary Economics, 1992, vol. 29, iss. 3, pp. 371–388. URL: Link90032-W

View all articles of issue


ISSN 2311-9438 (Online)
ISSN 2073-8005 (Print)

Journal current issue

Vol. 26, Iss. 1
March 2021