Practical analysis for investment professionals
26 February 2014

Exploring Cross-Sectional Effects of Inflation

The US generally accepted accounting principles (GAAP) do not require adjustments for inflation, so financial statements are reported in nominal terms. This struck Yaniv Konchitchki as problematic. In his article “Accounting and the Macroeconomy: The Case of Aggregate Price-Level Effects on Individual Stocks,” published in the November/December 2013 issue of the Financial Analysts Journal, Konchitchki examines stock-valuation effects of aggregate price-level changes on individual companies. He shares his thoughts about his work in the latest installment of our FAJ author interview series.

“Inflation affects all assets and liabilities; therefore, even low inflation leads to major economic effects on firms,” he says. Konchitchki’s research shows that inflation-based investment strategies conditioned on available information result in significant risk-adjusted returns.

Furthermore, he demonstrates that investing using the inflation effect on companies’ net monetary holdings results in insignificant abnormal hedge returns, whereas investing using the inflation effect on companies’ nonmonetary holdings consistently yields economically and statistically significant hedge returns.

Konchitchki says his research has important implications for valuation. Noting that he provides algorithms that can be adjusted for specific firms and shows how investors can benefit from these adjustments, Konchitchki points out that it is now possible to adjust for inflation without waiting on the US SEC to impose an inflation-adjusted reporting regime.

To hear Konchitchki discuss his research further, listen to the full interview (above) or download the MP3.

CFA Institute members can access the full article on the CFA Publications website.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

About the Author(s)
Abby Farson Pratt

Abby Farson Pratt was an assistant editor at CFA Institute. Previously, she worked at the Denver Post and the University of North Carolina Press. Pratt earned the Claritas™ Investment Certificate and holds a BA in journalism and English from the University of North Carolina at Chapel Hill.

1 thought on “Exploring Cross-Sectional Effects of Inflation”

  1. john paulson says:

    Fascinating article. I’ve argued for years that the fact that financial statements do not provide inflation exposure information provides opportunities. we use this fact in the hedge fund business. Very creative, clever, innovative, and well done study and interview.

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