Inflation Protection Research Articles

Rent or Buy? Inflation Experiences and Homeownership within and across Countries

ABSTRACTWe show that past inflation experiences strongly predict homeownership within and across countries. First, we collect novel survey data, which reveal inflation protection to be a key motivation for homeownership, especially after high inflation experiences. Second, using household data from 22 European countries, we find that higher exposure to historical inflation predicts higher homeownership rates. We estimate similar associations among immigrants to the United States who experienced different past inflation in their home countries but face the same U.S. housing market. Consistent with the experience effects model, the relationship is strongest in countries with predominantly fixed‐rate mortgages.

Aspects of determination and classification of current assets of the enterprise according to national and international accounting standards

During the period of operation, the national accounting system in Ukraine is in the process of reformand continuous improvement. Modern conditions of Ukraine's integration into the European space necessitate the adaptation of the regulatory framework to the legislation of the European Union, and accounting inparticular. For the operation of any enterprise assets are required, both non-current and current. The articleexamines the definition of the category of "current assets" and their classification according to national andinternational accounting standards, for the organization of their accounting and effective management. According to the results of the study of the essence of the category "current assets" it was found that their interpretation according to national standards corresponds to international ones, and according to the scientificapproach - allowed to identify several approaches (directions) to explain their essence. The study of approaches to the classification of current assets revealed their main classification features. But, according tothe authors, it is also necessary to use the classification for modern management, organization of more efficient and effective accounting, analysis, audit and management in the enterprise, risk management, liquidity,inflation protection, turnover and profitability. The classification of current assets according to internationaland national accounting standards by type of current assets has been systematized and their comparison bycomposition of elements has been carried out.

The Best Strategies for Inflationary Times

Over the past three decades, a sustained surge in inflation has been absent in developed markets. As a result, investors face the challenge of having limited experience and no recent data to guide the repositioning of their portfolios in the face of heightened inflation risk. In this article, the authors provide some insight by analyzing both passive and active strategies across a variety of asset classes for the United States, the United Kingdom, and Japan over the past 95 years. Unexpected inflation is bad news for traditional assets, such as bonds and equities, with local inflation having the greatest effect. Commodities have positive returns during inflation surges, but there is considerable variation within the commodity complex. Among the active strategies, the authors find that trend-following provides the most reliable protection during important inflation shocks. Active equity factor strategies also provide some degree of hedging ability. The authors also provide an analysis of alternative asset classes such as fine art and discuss the economic rationale for including cryptocurrencies as part of a strategy to protect against inflation. <b>TOPICS:</b>Developed markets, financial crises and financial market history, risk management, portfolio management/multi-asset allocation <b>Key Findings</b> ▪ The authors examine a range of passive and active strategies using a century of data in the United States, the United Kingdom, and Japan and find that passive equity and fixed-income strategies fare poorly during inflation surges. ▪ Commodities provide historical inflation protection, as do collectibles such as wine and fine art. ▪ Active strategies such as trend-following fare well during historical inflation surges, and equity factor strategies such as quality provide some protection.

Rethinking Commodities

Commodities have long been viewed as the poor cousin in the investment universe, and often for a good reason. Unlike equities, commodities do not offer a so-called market beta with prices drifting higher over time in line with economic activity. In contrast, they present a collection of unique price returns that reflect the underlying supply and demand dynamics of physical assets that serve as the global economy’s building blocks. This article takes a new look at commodities as an asset class and at their uses in a portfolio, which historically have been diversification and inflation protection. The authors analyze different commodity beta allocations and identify alternative investment uses of commodities. Such uses include building blocks to express particular investment themes, tactical trading tools, and multiasset risk premia allocation components. <b>TOPICS:</b>Commodities, portfolio construction, financial crises and financial market history <b>Key Findings</b> ▪ Although investors have rightly questioned the benefits of commodities in a diversified portfolio over the past decade, there may still be some validity to the diversification and inflation protection arguments touted by long-only commodity advocates. ▪ Evidence suggests a positive relationship between the level of inflation and returns of a broad basket of commodities. The contemporaneous nature of this relationship can make it difficult to capture unless exposure is held continuously, which may be an unjustifiable drag on the performance of a diversified multiasset portfolio. ▪ The commodities market is well suited to risk premia strategies. It is a unique market in which participants with different objectives interact on a futures curve, thereby creating persistent and harvestable risk premia.

Decentralizing Money: Bitcoin Prices and Blockchain Security

Abstract We address the determination of bitcoin prices and decentralized security. Users forecast the transactional and resale values of holdings, pricing the risk of systemic attacks. Miners contribute resources to protect against attackers and compete for block rewards. Bitcoin’s design leads to multiple equilibria: the same blockchain technology is consistent with sharply different price and security levels. Bitcoin’s monetary policy can lead to welfare losses and deviations from quantity theory. Price-security feedback amplifies fundamental shocks’ volatility impact and leads to boom and busts unconnected to fundamentals. We characterize how viability versus fiat currency depends on bitcoin’s relative acceptability and inflation protection.

The Long Shadows of the Great Inflation: Evidence from Residential Mortgages

A major puzzle in financial contracting is consumers' aversion to adjustable rates. In the mortgage market, the empirical mix of contracts (80% fixed-rate) is inconsistent with standard life-cycle consumption models. We argue that these choices reflect the longlasting effect of the Great Inflation, and have sizable welfare implications. First, we show that consumers who have experienced higher inflation expect higher future interest-rate increases, which explains their preference for fixed-rate financing. Next, we quantify the influence of personal inflation experiences on mortgage financing using linked data from the Census Bureau's Residential Finance Survey. We estimate a discrete-choice model over mortgage financing alternatives. The structural parameters indicate that one additional percentage point of experienced inflation increases a borrower's willingness to pay for a fixed-rate mortgage by 6 to 14 basis points, compared to the adjustable-rate alternative in a given origination year. This experience effect has a major impact on the product mix of FRMs versus ARMs: Nearly one in seven households would switch to an ARM if not for the longlasting effect of personal inflation experiences. Our simulations suggest that households who would otherwise have switched pay $8,000-$16,000 in year-2000, after-tax dollars for the embedded inflation protection of the FRM.

Preferences for private long-term care insurance products in a super-ageing society: A discrete choice experiment in Hong Kong.

There is a stark contrast between rising long-term care (LTC) demands and limited financing capacity in many ageing societies. Despite the theoretical potential of private insurance in LTC financing reforms, the reality is that the market remains remarkably underdeveloped. This study adopts a novel two-phase approach to quantitatively examine the market demand for private long-term care insurance (LTCI) in Hong Kong, one of the world's super-ageing societies. In order to examine people's preferences regarding private LTCI in Hong Kong, which has been exploring alternative LTC financing mechanisms to relieve the overburdened public system, we conducted a discrete choice experiment (DCE) in 2019 to elicit the preferences of a representative sample of 410 middle-aged adults. At first, we used data from the US National Longterm Care Survey to perform an actuarial projection for Hong Kong. In the first phase, we computed the indicative premiums based on various attributes of hypothetical private LTCI products. Undertaken in the second phase and using two econometric techniques, the DCE suggested that the most preferred hypothetical LTCI product in Hong Kong was associated with the following features: 1) a monthly benefit level of HK$20,000 or HK$25,000, 2) 3% inflation protection, and 3) 15 years of contribution. These attributes led to a monthly premium of HK$1237 (US$160)/HK$1546 (US$200) for men and HK$2150 (US$278)/HK$2687 (US$348) for women. Furthermore, we also found that the preference for LTCI products varied across people with different socioeconomic and health characteristics. These insights could inform initial market segmentation, LTCI product design, and targeted marketing in the future. This paper concludes with cautious optimism regarding the market demand for private LTCI in Hong Kong, and recommends concrete policy instruments to nurture the LTCI market, including information campaign, premium subsidies, and tax benefits.

The Golden Variable?

New econometrics produce a jaundiced view of the golden constant, which lauds gold as an inflation hedge. Price-level-based valuation errors correct at a snail’s pace, if at all. But this study shows that lagged errors affect the variance rather than the mean of gold returns, as overvaluation corresponds with considerably wider conditional distributions. Also, gold’s hedging value is mixed even over centuries, given data as far back as 1257 A.D. The price elasticity of gold to inflation does increase over longer horizons. But prevailing misvaluations are even less likely to resolve over the extended haul. In addition, the correlation between gold and TIPS-based estimated inflation expectations and premiums is highly volatile and perversely positive through the 2010s, more consistent with a golden variable, if not an antithesis of inflation protection amid unconventional monetary policy. TOPICS:Other real assets, currency Key Findings • Econometrics produce a jaundiced view of the “golden constant,” which lauds gold as an inflation hedge. Valuation errors based on price-level benchmarks correct at a snail’s pace, if at all since the mid-1970s in the US, and lagged errors affect the variance more than the mean of gold returns, as overvaluation corresponds with wider conditional distributions and therefore uncertainty. • Also, gold’s hedging value is mixed even over centuries, given data as far back as 1257 A.D. The price elasticity of gold to inflation does increase over longer horizons. However, prevailing mis-valuations are even less likely to resolve over the extended haul. • In addition, the correlation between gold and TIPS-based estimated inflation expectations and premiums is highly volatile and perversely positive through the 2010s, more consistent with a “golden variable,” if not an antithesis of inflation protection amid unconventional monetary policy measures. These results also cast doubts regarding any relation between real yields and the asset, insofar as TIPS and gold are not substitutes.

What’s in Your Real Asset Portfolio? Introducing RASA &lt;sup&gt;TM&lt;/sup&gt;

In prior research we highlighted the diversity of real assets in terms of their sensitivities to the equity and bond markets and to macroeconomic factors such as growth and inflation. We now extend our analysis to real asset portfolios. Do portfolios exhibit similar characteristics and performance? Or, like the real assets themselves, do real asset portfolios display heterogeneity, with a given portfolio serving a particular investment goal and purpose? We use our Real Asset Sensitivity Analysis (RASA TM) framework to help CIOs estimate the macroeconomic and market sensitivities of a real asset portfolio. Institutional investors have increased their allocations to real assets, either assembling the real asset portfolio themselves from the ground up; investing in a third-party real asset fund; or some combination of the two. To illustrate the diversity of real asset portfolios, we examine third-party public, liquid, real asset funds. RASA sensitivities differ considerably across funds and can differ even when funds have similar broad asset allocations. Institutional investors can use RASA to gauge whether a real asset fund, or custom portfolio, aligns with their investment objectives. Using RASA, we identify fund groups that are likely suited for distinct economic environments. An investor can use this information to select funds that may achieve a targeted investment objective-oriented strategy such as Inflation Protection, Growth, or Growth Protection.

ANALISIS PERBANDINGAN PEMBIAYAAN BARANG MODAL ANTARA SEWA GUNA USAHA DENGAN PINJAMAN PERBANKAN DAN KAITANNYA DENGAN BIAYA PAJAK PADA PT. DUTA ABADI PRIMANTARA

This study aims to determine ways of financing assets using bank credit or withleasing to a company, where the company opts for bank credit and leasing tomake income tax savings. The study was conducted at PT. Duta Abadi Primantarawith the calculation of fiscal costs and commercial costs with the type of casestudy research. The data obtained are primary data collected throughdocumentation obtained from the company. The data collected includescommercial and fiscal calculation reports. Based on research results obtainedthat the company chose financing of assets with leasing because it saves capital,flexible requirements, lower costs, ease of budgeting, profitable cash flow andalso inflation protection.

The inflation hedging properties of South African and international asset classes

ABSTRACTWithin the period 1965 to 2015 all domestic asset class returns (except cash) are found to exhibit negative correlations with the contemporaneous inflation rate. Cash has hedging qualities due to Reserve Bank inflation targeting policy action but has a low real yield. Furthermore, Engle-Granger cointegration tests show that none of the asset class prices displays a long-term equilibrium relationship with the CPI. Using local growth assets as “inflation hedges” in a “CPI plus” mandate is more of an attempt to outperform inflation than to actually hedge against it.In contrast, it was found that “rand-hedge” asset classes could offer inflation protection. Offshore bond returns exhibited a significant positive contemporaneous relationship with inflation over a one- to three-year horizon and was the only asset class to do so. Looking at non-contemporaneous relationships, the prior 12-month rand returns on all foreign asset classes (and the local RESI) were found to be positively correlated with current inflation due to the return enhancement of rand weakening later feeding through into future imported inflation. Thus, rand hedges offer an “up-front” compensation for future inflation and, understood as such, can provide effective inflation protection for locally based investors.

Retirement Shares Plan: A New Model of Risk Sharing

Investment risk and longevity risk are borne by the plan sponsor in a defined benefit (DB) plan or by the plan participant in a defined contribution (DC) plan. By contrast, our proposed Retirement Shares Plan (RSP) allocates the longevity risk to the plan sponsor and investment risk to the plan participant. The RSP allows the participant sufficient control over the investment risk to tailor that risk to his specific circumstances. This allocation of risk provides predictable and stable cost to the plan sponsor with little chance of unfunded liabilities. The retiree receives lifetime income and potential inflation protection.

Achieving Retirement Income Security: A Comparison of Guaranteed Lifetime Withdrawal Benefit, Systematic Withdrawal and Partial Variable Annuity Strategies

Many retirement income products attempt to satisfy multiple and sometimes conflicting objectives because retirees desire products that provide retirement security, inflation protection, liquidity, asset growth and the potential for an estate. In this paper, we used historical data over the past 90 years to conduct simulations and analyze how a Guaranteed Lifetime Withdrawal Benefit (GLWB), systematic withdrawal, and partial Variable Immediate Annuity (VIA) strategies performed in meeting these multiple objectives. With the exception of retirement income starting dates at the beginning of the Great Depression, all three strategies performed well in providing income throughout retired life. The partial VIA and GLWB strategies provided better “peace of mind” retirement income products, while the systematic withdrawal strategy offered the greatest flexibility in managing retirement assets. Overall, we conclude that a partial VIA income strategy comprised of a VIA and supplemental liquid asset account would have provided the best mixture of income generation, risk management, and estate potential for the majority of cohorts.

Can (Financial) Ignorance Be Bliss?

Financial illiteracy is widespread and leads to bad financial decisions. Individuals cannot answer basic questions about inflation, compounding, and diversification. This article argues that financial literacy programs should be complemented with a new class of financial instruments that embed goal-specific compounding and inflation protection. These income-only real bonds, with a forward start date, would pay investors for the period required for the respective goal. Further, there is ample potential supply from natural issuers. This innovation trivializes the investment problem to just simple multiplication or division, thereby addressing the challenge of financial illiteracy with financial innovation across a range of saving/investment goals.

Bitcoin As Decentralized Money: Prices, Mining Rewards, and Network Security

We address the determination of bitcoin prices and decentralized security. Users forecast the transactional and resale value of holdings, pricing the risk of malicious systemic attacks. Miners contribute resources to protect against attackers, competing for block rewards. Bitcoin’s design leads to multiple equilibria: the same technology and fundamentals are consistent with sharply different price and security levels. Bitcoin’s monetary policy can lead to welfare losses and deviations from quantity theory. Price–security feedback amplifies fundamental shocks’ volatility impact and leads to boom–busts not driven by fundamentals. We show how Bitcoin’s viability versus fiat currency depends on relative acceptability and inflation protection.

Consumer Numeracy and Insurance Design Decisions: An Examination of Inflation Protection Take-Up Among Private Long-Term Care Insurance Policy Holders.

Given the rising cost of long-term care (LTC) services, the selection of a private long-term care insurance (LTCi) policy with inflation protection has critical implications for the ability of this coverage to protect against potentially catastrophic LTC expenses. This study examines the effect of consumers' numeric abilities on the decision to add inflation protection to private LTCi policies. Over 40% of current LTCi policies lack inflation protection. Higher scores on a three-question numeracy scale are associated with increases in the probability of choosing inflation protection at the time of policy purchase, with households answering all three questions correctly being 12 percentage points more likely to have this benefit type relative to those with a numeracy score of 0 (p = .002). Market reforms that simplify the task of evaluating LTCi plans and assessing the value of indexed benefits may be needed to ensure that LTCi policy purchasers are selecting adequate protection against future LTC costs.

Addressing Financial Illiteracy Through Financial Innovation: The Case for Goal-Specific Bonds the Embed Inflation and Compounding

Financial illiteracy is widespread and leads to bad financial decisions (high debt, insufficient savings). Individuals cannot answer basic questions about inflation, compounding, and diversification. While financial literacy can be enhanced, are individuals teachable, and if so, what should they be taught and how lasting is the training? Prof. Merton suggests that some individuals can only be helped with innovation; Prof. Richard Thaler has argued for making the financial system more “user-friendly”. This paper argues that given the challenges posed by finance theory and financial instruments (in turn for financial literacy programs), a complementary approach along the lines of Profs. Merton’s and Thaler’s recommendations would introduce new financial instruments that embed goal-specific compounding and inflation protection. These interest-only real bonds (with goal-specific indexation), with a forward start date, would pay coupons for the period required for the respective goal. Further, there is ample potential supply from natural issuers. This innovation trivializes the investment problem to just simple multiplication or division thereby addressing the challenge of financial illiteracy with financial innovation across a range of saving/investment goals!

Asset allocation for a DC pension fund under stochastic interest rates and inflation-protected guarantee

This paper aims to propose referable asset allocation criteria for a defined-contribution (DC) pension plan under stochastic interest rates and the minimum guarantee of inflation protection on annuities. Motivated by the work of Litterman and Scheinkman (1991), which verifies that interest rate risks could be properly modeled with multiple factors, our proposed model extends the Jarrow and Yildirim (JY, 2003) model to a multi-factor framework, and simultaneously incorporates a stock asset to develop what is called the extended JY model in this study. The extended JY model can specify an economic environment with the consideration of risks arising from nominal and real interest rates, the CPI index (inflation rates), and the value of a stock portfolio, which facilitates to complete the closed-form solutions for the stochastic dynamic programming problem of a DC pension plan. The subsequent numerical experiment examines the allocative behaviors in an inflationary economy. In addition, the term effects among interest rates show to have a substantial impact on allocative decisions, and thus can be properly exploited to improve the final wealth of the pension fund.

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Decisions about life annuities are an important part of consumer decumulation of retirement assets, yet they are relatively underexplored by marketing researchers studying consumer financial decision making. In this article, the authors propose and estimate a model of individual preferences for life annuity attributes using a choice-based stated-preference survey. Annuities are presented in terms of consumer-relevant attributes such as monthly income, yearly adjustments, period certain guarantees, and company financial strength. The authors find that these attributes directly influence consumer preferences beyond their impact on the annuity's expected present value. The strength of the direct influence depends on how annuities are described: when annuities are represented only through basic attributes, consumers undervalue inflation protection, and preferences are not monotonically increasing in duration of period certain guarantees. When descriptions of annuities are enriched with cumulative payment information, consumers no longer undervalue inflation protection, but nonlinear preferences for period certain options remain. The authors find that among annuities with the same expected payout but different annual increases and period certain guarantees, the proportion of consumers who choose the annuity over self-management can vary by more than a factor of 2.

Inflation Protected Investment Strategies

In this paper, a dynamic inflation-protected investment strategy is presented, which is based on traditional asset classes and Markov-switching models. Different stock market, as well as inflation regimes are identified, and within those regimes, the inflation hedging potential of stocks, bonds, real estate, commodities and gold are investigated. Within each regime, we determine optimal investment portfolios driven by the investment idea of protection from losses due to changing inflation if inflation is rising or high, but decoupling the performance from inflation if inflation is low. The results clearly indicate that these asset classes behave differently in different stock market and inflation regimes. Whereas in the long-run, we agree with the general opinion in the literature that stocks and bonds are a suitable hedge against inflation, we observe for short time horizons that the hedging potential of each asset class, especially of real estate and commodities, depend strongly on the state of the current market environment. Thus, our approach provides a possible explanation for different statements in the literature regarding the inflation hedging properties of these asset classes. A dynamic inflation-protected investment strategy is developed, which combines inflation protection and upside potential. This strategy outperforms standard buy-and-hold strategies, as well as the well-known 1 N -portfolio.