On Hedging Properties of Infrastructure Assets during the Pandemic: What We Learn from Global and Emerging Markets?

Bambang Susantono,Donghyun Park,Shu Tian,Gazi Salah Uddin

doi:10.3390/su14052987

Bambang Susantono, Donghyun Park + Show 2 more

Open Access

https://doi.org/10.3390/su14052987

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Abstract

Infrastructure investment is essential for economic development for both developed and developing economies. We analyze the short-term return behavior and portfolio characteristics of the global, regional, and selected Asian countries’ infrastructure indexes during the pandemic over the sample period 3 July 2018 to 1 July 2021. According to the multivariate Glosten, Jagannathan, and Runkle (GJR) Generalized Autoregressive Conditional Heteroscedasticity (GARCH) with dynamic conditional correlation (DCC) model, infrastructure assets are very heterogeneous depending on the corresponding asset classes. Empirical evidence suggests that infrastructure can be treated as a separate asset sub-class within conventional financial assets. Moreover, we quantify the co-movements between returns on various listed infrastructure indexes and major asset classes, including equity, commodity, currency, and bond index returns. We find that infrastructure assets offer hedging potential against the USD index and USD denominated assets.

Highlights

The last decade saw an increased interest from institutional and private investors in alternative assets expected to decrease portfolio return variability. This development can be understood in light of the heavy blow dealt with global equity markets by the dot-com bubble and global financial crisis
The findings indicate that infrastructure assets offer hedging potential against the USD index and USD denominated assets
We observe that the time-varying correlation between infrastructure indexes and equity, bond, and oil prices are persistently positive for most of the investigated sample period

Summary

Introduction

The last decade saw an increased interest from institutional and private investors in alternative assets expected to decrease portfolio return variability. To the best of the authors’ knowledge, the current study, which focuses on the relationship between infrastructure indexes and other financial assets, first gives a significant insight into infrastructure investment as hedging and diversification potentials. From a methodological standpoint, this study uses the DCC-GJRGARCH (1, 1) approach to capture the time-varying relationship between infrastructure indexes and other financial assets. Qt = (1 − a − b)S + adiag( Qt−1 )1/2 εi,t−1 ε0i,t−1 diag( Qt−1 )1/2 + bQt−1 This implies that the conditional correlation is dynamically driven by the process of ( Qt ) where S is the n × n unconditional covariance matrix for the standardized residuals εi,t , and a,b are non-negative scalars satisfying a + b < 1. Jiang et al [14] applied the DCC-GARCH model to study the dynamic relationship between the oil market and China’s commodity market

Data Construction and Summary Statistics

Results and Discussion

Conclusions and Policy Implications