Inflation, Inflation Uncertainty and Asset Returns: Cross Country Evidences

Abstract

The question whether an asset class is a good hedge against inflation is extensively investigated in the finance and economics literature; however, most of these are concentrated on stock returns from developed countries perspectives with little or no evidence on either from alternative asset classes or emerging and developing countries context. Inflation and inflation volatility have a feedback relationship, which affect investor’s real return. Despite of that literature is also scare on the relationship of inflation uncertainty and asset returns. Against this backdrop, using Fisher hypotheses as benchmark, this paper investigates whether asset return is hedge against inflation and inflation uncertainty for data of 41 developed, emerging and developing countries for 3 asset classes namely, stocks, bonds and real estate. Given varied monetary, exchange rate policies and institutional arrangement across developed and developing countries, the main argument in this paper is that stock and real estate are better inflation hedges than bonds because they constitute claims against real or physical asset and better adjust with inflation shocks, While for bonds higher, inflation reduces the price of bonds through increase in discount rate and hence decrease bonds returns. Our econometric analysis finds support for real estate not for stocks. As anticipated, investors will not be able to hedge inflation by investing in bonds.