Inflation Hedging Research Articles

Inflation hedging: a comparative wavelet quantile correlation analysis of real estate and alternative assets

PurposeConducting an analysis spanning from 2000 to 2023, this research evaluates the effectiveness of real estate assets in hedging against global and energy inflation, benchmarked against other compelling investment options such as oil, gold, silver and stocks.Design/methodology/approachThis study employs the wavelet quantile correlation (WQC) methodology. The latter sheds light on dynamic market interactions by scrutinising dependency structures across multiple time scales and also by capturing tail dependence. The adaptability of the wavelet transform, across a spectrum of frequencies, emerges as an indispensable tool for studying time series while also unravelling relationships among variables across diverse quantiles.FindingsThe findings reveal that the response to inflationary pressures is contingent upon the asset class, investment horizon and type of inflation under consideration. While precious metals demonstrate effectiveness over short-term horizons, French-listed real estate exhibits compelling inflation-hedging characteristics as the investment horizon extends. Oil emerges as an unequivocal hedge against both global and energy inflation.Practical implicationsTo counteract the effects of inflation, investors and households may feel compelled to refine their investment strategies, opting to bolster their portfolios with instruments proven to serve as reliable safeguards against inflation, as indicated by this study.Originality/valueIn conjunction with a surge in inflationary pressures, this study delves into the hedging capabilities of assets, exploring their efficacy not only across short- and long-term investment horizons but also within diverse scenarios characterized by fluctuating levels of global and energy-related inflation. To the best of our knowledge, no previous article employed the WQC technique to evaluate the inflation-hedging nexus.

Inflation Hedge Abilities of Stock Returns Compared to Government Debt Securities in Egypt: Evidence from ARDL and NARDL Frameworks

Inflation Hedge Abilities of Stock Returns Compared to Government Debt Securities in Egypt: Evidence from ARDL and NARDL Frameworks

Hedging Using Digital Currencies Against Inflation Risks In Light Of The Globalization Of Economic Activity: A Theoretical Study

This theoretical study explores the potential of digital currencies as a hedging tool against inflation risks in the context of globalized economic activity. With the increasing interconnectedness of economies and the volatility of traditional currencies, investors and businesses are seeking alternative ways to protect their wealth from the eroding effects of inflation. Digital currencies, with their unique characteristics such as decentralization and limited supply, have emerged as a potential solution. This research investigates the theoretical underpinnings of using digital currencies for inflation hedging, analyzing their correlation with traditional assets and their performance during periods of high inflation. By examining the factors influencing the effectiveness of digital currencies as a hedge, this study aims to provide insights for investors and policymakers seeking to navigate the complexities of the global economic landscape. Keywords: digital currencies, inflation hedging, globalization, economic activity, theoretical study

Comparative Analysis of Gold, Art, and Wheat as Inflation Hedges

This study confirms gold’s role as a reliable inflation hedge while introducing new insights into lesser-explored assets like art and wheat. Using advanced methodologies such as the ARDL framework and LSTM deep learning, it conducts a detailed analysis of inflation-hedging dynamics, exploring non-linear relationships and unexpected inflation impacts across various asset classes. The findings reveal complex dynamics. Gold demonstrates strong long-term inflation hedging potential. The negative coefficient for the US dollar index suggests that gold acts as a hedge against currency depreciation. Furthermore, a positive relationship between gold returns and inflation during high inflation periods highlights its effectiveness in protecting purchasing power. Art presents a more intricate picture. Long-term analysis suggests a weak mean-reverting tendency, but a negative relationship with inflation, potentially linked to economic downturns. Interestingly, unexpected inflation positively correlates with art returns in the long run, hinting at its potential inflation-hedging abilities. No statistically significant connection between wheat prices and overall inflation was observed; the short-run analysis reveals a dynamic interplay between inflation, real GDP growth, and wheat prices at different time points.

Determinants of housing prices: Serbian Cities’ perspective

This study investigates the spatial and temporal dynamics of housing prices in Serbia, addressing the critical need to understand the drivers of real estate prices and their implications for economic and social welfare. Employing a panel data analysis approach on a unique dataset covering 24 distinct urban areas in Serbia from 2011 to 2021, we examine the relevance of diverse economic, demographic, and infrastructural indicators, providing novel insights within a developing country context. Our findings reveal that the housing market stock-flow model effectively predicts housing price appreciation trends, explaining over 60 percent of variation in property prices. Notably, disparities in labour income, captured by average wages and registered employment rates, emerge as significant determinants of real estate prices, underlining socio-economic disparities within Serbian cities. Housing prices exhibit a positive response to the population/housing stock ratio, suggesting higher prices in cities experiencing faster population growth relative to housing supply. Intensified construction is associated with elevated housing prices. Additionally, we find positive association between the inflation variable and housing prices, underlining real estate’s potential as an inflation hedge. Public service provision and infrastructural amenities also emerge as contributors to higher housing prices in urban areas, emphasizing the importance of comprehensive urban planning strategies. Our study contributes to the literature by providing specific quantitative evidence, advancing the understanding of urban housing market dynamics in developing countries. By offering nuanced insights into determinants of housing prices, our research informs policymakers and urban planners seeking to foster equitable and sustainable urban development strategies.

Practical Applications of Inflation Hedging Tools—What Works and What Doesn’t

Practical Applications of Inflation Hedging Tools—What Works and What Doesn’t

Inflation, Monetary Policy, and Portfolio Decisions of U.S. Households

We study the impact of monetary policy changes on portfolio decisions of U.S. households. Contrary to the predictions of canonical portfolio choice models, interest rate increases are related to increased equity ownership and larger wealth allocations to risky assets. Inflation hedging is a likely explanation for these findings. Interest rates have a stronger impact on the equity exposure of households that experience higher inflation, especially those with greater inflation awareness and potentially stronger hedging motives. Using household portfolios at a large discount brokerage house, we provide direct evidence that investors with greater inflation sensitivity overweight stocks with high hedging potential. This paper was accepted by Camelia Kuhnen, finance. Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2023.02197 .

On the resilience of cryptocurrencies: A quantile-frequency analysis of bitcoin and ethereum reactions in times of inflation and financial instability

This study examines the resilience of Bitcoin and Ethereum to inflation and financial instability amidst major economic and political disruptions, including the U.S.-China trade war, the COVID-19 pandemic, the Ukrainian conflict, the collapse of Silicon Valley Bank, and the ensuing energy crisis. We employ wavelet coherence analysis and the quantile coherence method to unravel the complex relationship between these cryptocurrency prices, the 5-year breakeven inflation rate, and the U.S. Financial Stress Index (FSI), utilizing daily data from April 16, 2018, to April 14, 2023. Our results reveal that during turbulent times, investors adjust their Bitcoin holdings in response to inflation expectations, driving up Bitcoin prices in both the short and long term. However, Bitcoin’s effectiveness as an inflation hedge diminishes in bearish market conditions, and it proves unreliable as a hedge against financial instability. The relationship between Ethereum and inflation expectations is found to be more context-dependent. Also, while Ethereum’s vulnerability to financial instability is less persistent in the long run, it increases in bearish markets.

The Potential of Residential Property in Poland as an Inflation Hedge Investment

Abstract The research objective of the article was to assess the potential of residential property in Poland as an inflation hedge investment. The study was conducted using innovative measures of the level of inflation hedging. The study was made for Poland’s six largest local residential markets, for two types of investments, for different investment horizons (from 6 to 15 years). The research period adopted was: 3Q2006-4Q2022. In all cities, investments providing only capital gains allowed an attractive inflation hedging level to be achieved. Investments that additionally included rental offered a high inflation hedging level. The variation in the six cities studied in terms of inflation hedging through housing investment was found to be very low. The question of how extending the investment horizon affected the inflation hedging ability was not firmly answered. Frequently, the extension of the investment horizon has been accompanied by an increase in the level of hedging.

Quantifying Risk in Investment Decision-Making

In the wake of inflation, investors engage in identifying inflation hedging instruments. Most importantly, investors attempt to minimize risk and maximize returns to safeguard against inflation. Risk plays an important role in this process. The objective of this research is to examine the relationship between risk factors and investor behavior, particularly in the Indian context. Based on the theory of planned behavior (TPB), we built a conceptual model investigating the intricate relationship between risk factors, investment priority, investment strategy and investment decision-making. We collected data from 537 respondents in the southern region of India and analyzed the data using Partial Least Squares Structural Equation Modeling (PLS-SEM). The result indicate: (i) risk factors (risk capacity, risk tolerance, and risk propensity) are positively related to investment priority and investment strategy, (ii) investment priority is positively related to investment decision-making, (iii) conscientiousness moderates the relationship between investment priority and investment decision-making, (iv) investment strategy is positively related to investment decision-making. Finally, the practical and theoretical implications for research are discussed.

The inflation hedging property of art: evidence from the US, UK and France

The inflation hedging property of art: evidence from the US, UK and France

U.S. and European Listed Real Estate as an Inflation Hedge

U.S. and European Listed Real Estate as an Inflation Hedge

Is bitcoin an inflation hedge?

Is bitcoin an inflation hedge?

Gold Price and Inflation Relationship in India: Empirical Study

Abstract: This empirical study investigates the complex relationship between gold prices and inflation in India, a country where gold is deeply entrenched not only as an economic asset but also as a cultural symbol. Recognizing gold's unique position in the Indian context, this research explores how global economic trends and domestic cultural practices converge to influence gold prices. The study utilizes examining key economic indicators such as crude oil prices, exchange rates, trade and fiscal deficits, and their interplay with gold prices. Employing unit root tests like KPSS and Ng-Perron, followed by Johansen’s cointegration analysis and Granger causality tests, the research uncovers significant long-term equilibrium relationships and directional influences among these variables. The findings reveal the multifaceted nature of gold in India, influenced by both global economic conditions and socio-cultural factors, offering insights crucial for policymakers and investors alike. This study contributes to a deeper understanding of the gold market in India, highlighting its role as an inflation hedge and its cultural significance, thereby enriching the broader discourse on gold in the global economic landscape.

Dynamics of the Inflation-Hedging Capabilities of Real Estate Investment Portfolios in the Nigerian Property Market

There has been a wide belief that real estate is a source of good investment portfolios because it has a hedge against inflation. Considering this notion, the present research examined the dynamics of the inflation-hedging capabilities of real estate investment in Nigeria’s three foremost property markets, Abuja (Maitama and Central Business District), Lagos (Lekki and Victoria Island), and Port Harcourt (Rumu Ibekwe and Aba Road). To achieve this aim, this study was carried out by exploring the returns on different types of commercial properties in the chosen location and investigating the effect of inflation on such returns in order to come up with the hedging capabilities of the assets. Out of the four property prime locations in Nigeria’s market, these selected study sites were purposely selected for investigation because they comprise the most desirable and preferred properties regarding location, standards, aesthetics, and value. From the data collected, a mean return, coefficient of variation, and ordinary least square regression analysis were completed. In terms of the coefficient of variation (CV), the findings reveal that the duplex in Port Harcourt exhibits the most performed investment, with a value of 0.33, compared to other locations. However, in terms of the expected return (ER), the duplex outperformed other property types in the different locations, with a return of 39.56%. Results also show that inflation has an adverse effect on the returns of the office space for the three locations considered, with the expected returns below 1%. The block of flats in Abuja has a complete defence against the three components of inflation, with a coefficient beta of 0.5633, 0.6586, and 0.8440, respectively. Thus, investors should consider inflation and other investment attributes when making decisions among arrays of investments. This will help guard against the widespread perception that real estate has a hedge against inflation. This paper adds to the existing literature on inflation hedging by investigating the effect of inflation on the real estate investment returns of commercial properties.

Cryptocurrency as an alternative inflation hedge?

AbstractWe examine the association of Bitcoin, and other cryptocurrency, returns with changes in inflation expectations, and form a comparison with gold, a traditional inflation hedge. We control for uncertainty in economic policy, cryptocurrency, and financial markets, and show that cryptocurrency returns are positively related to changes in US inflation expectations only for a limited set of circumstances. Unlike with gold, the identified relationship is only significant for short‐term inflation expectations, and when inflation or market‐implied inflation expectations are below 2% (the Fed's inflation target). Moreover, cryptocurrency returns tend to be lower on days with monthly consumer price index (CPI) announcements and respond negatively to CPI surprises. Our results suggest that cryptocurrencies do not currently offer investors a viable alternative to gold for hedging inflation.

An Empirical Investigation of Bitcoin Hedging Capabilities against Inflation using VECM: The Case of United States, Eurozone, Philippines, Ukraine, Canada, India, and Nigeria

This study examines Bitcoin's potential as an inflation hedge in different countries, including the United States, the Eurozone, the Philippines, Ukraine, Canada, India, and Nigeria. The study reveals varying results across countries using the Vector Error Correlation Model (VECM) with secondary monthly data from January 2012 to June 2023 for Bitcoin prices and inflation rates. Bitcoin exhibits an insignificant short-term relationship in the United States but a significant long-term negative correlation, suggesting it may not be a reliable inflation hedge. Similarly, no significant relationship was found in the Eurozone, the Philippines, Ukraine and Nigeria, indicating Bitcoin's limited effectiveness as an inflation hedge. Contrastingly, the study identifies a significant positive relationship between Bitcoin and inflation in Canada and India, indicating potential hedging against inflation within these economies. Therefore, investors, portfolio managers, and policymakers should consider these country-specific findings when evaluating Bitcoin's role as an inflation hedge. Furthermore, this study contributes valuable insights into cryptocurrencies and their potential in financial risk management.

Listed Real Estate as an Inflation Hedge Across Regimes

AbstractThis paper examines the inflation-hedging capability of listed real estate (LRE) companies in the US from 1975 to 2023, and in three other economies—the UK, Japan, and Australia—from 1990 to 2023. By using a Markov switching vector error correction model (MS-VECM), we identify that the short-term hedging ability moves towards being negative or zero during turbulent periods. In stable periods, LRE provides good protection against inflation. In the long term, LRE offers a good hedge against expected inflation and shows a superior inflation hedging ability than stocks. Additionally, we identify inflation-hedging portfolios by minimizing the expected shortfall. This inflation-hedging portfolio allocation methodology suggests that listed real estate stocks should play a significant role in investor portfolios.

Do commodity factors work as inflation hedges and safe havens?

This study investigates whether commodity futures factor portfolios work as hedges and safe havens against inflation shocks. We observe that momentum, basis momentum, and a combination of factor portfolios act as strong hedges against core inflation shocks, suggesting that holding the factor portfolios generates not only higher Sharpe ratios but also strong hedge effects against inflation. Moreover, the momentum, basis momentum, and value portfolios have weak safe haven properties against inflation shocks. In addition, our empirical results suggest that hedge effects for commodity future portfolios are stronger during the pre-financialization period.

Inflation Hedging Potential of Infrastructure Sector and Sub-Sector Returns—Evidence from Emerging Markets

Inflation Hedging Potential of Infrastructure Sector and Sub-Sector Returns—Evidence from Emerging Markets