Unexpected Inflation Research Articles

Inflation‐hedging properties of indirect real estate investments in Germany

PurposeThis paper seeks to shed light on the question whether German real estate investment vehicles provide an effective hedge against inflation. To do so it aims to investigate open‐end real estate funds, special funds and real estate stocks.Design/methodology/approachTraditional approaches as well as cointegration and causality tests are applied to monthly and quarterly index data from 1992:04 to 2009:12 for the subject investment vehicles.FindingsThere is strong evidence that real estate returns are almost independent from inflation in the short run. None of the investigated investment vehicles provide a hedge against expected and unexpected inflation at different lags. In contrast, cointegration tests show that real estate stocks, open‐end funds and special funds do provide a hedge against inflation in the long term. Likewise, causality tests suggest that real estate performance is influenced by inflation in the long term.Research limitations/implicationsThe study still could not investigate closed‐end funds and G‐REITs. Yet, it does capture the most and comprehensive part of the indirect German real estate investment market.Practical implicationsInflation‐hedging capabilities are of particular interest in periods of economic instability. Especially institutional investors with large asset portfolios seek to adjust their asset allocation to changing conditions.Originality/valueTo date, research papers on the subject of inflation‐hedging capabilities of real estate almost exclusively focus on REITs in the USA and in the UK. Research about the German real estate market and alternative investment vehicles is rare – partly due to a lack of transparency over the past – although international investors more and more adhere to the German real estate investment market.

Direct Commercial Real Estate as an Inflation Hedge: Korean Evidence

We examine whether direct commercial real estate (CRE) is an inflation hedge using the Korean market. We find that Korean CRE shows shor-trun positive co-movement with both expected and unexpected inflation, indicating that CRE serves as a short-run inflation hedge. We also find that inflation and CRE prices move in the same direction over the long run as well indicating that CRE serves as a long run positive inflation hedge. On the other hand, we find that listed equity is a short-run negative hedge and a long run positive hedge. Therefore, we conclude that CRE is an asset class that is different from listed stock. Finally, while GDP and inflation appear to be the common factors driving Korean CRE markets and listed equity capital markets (ECM), ECM returns lead CRE returns, suggesting that value-relevant information flows into the ECM, then into CRE.

International linkage of inflation rates in a dynamic general equilibrium

This paper uses the Neumeyer–Yano’s monetary dynamic general equilibrium model to investigate the inter-connectivity of the world economy through bond holding beyond national borders. The possibility that unexpected inflation in one country transmits to another is demonstrated within a framework in which the nominal exchange rate is flexibly determined so that the purchasing power parity holds. Deflation can also be imported through the same channel. Whether inflation or deflation diffuses internationally depends on the level of fiscal deficit. Although a country may suffer from monetary disturbances from abroad, each country can completely defend itself by implementing appropriate fiscal policies.

Asymmetric and cross-sectional effects of inflation on stock returns under varying monetary conditions

This study examines the relationship between returns on portfolios, comprised of stocks of various size and book values, and changes in inflation. The relationship is evaluated in the context of positive and negative changes in expected and unexpected inflation, and expansionary and contractionary monetary policy conditions. Results from the panel estimation procedure show that inflation has a strong asymmetric impact on stock returns, and this may explain why simply summing up inflation shocks, as in previous studies, could lead to misleading conclusions. This article concludes that the nature of this asymmetric relationship is complex and contingent on several factors including the state of the monetary policy, whether one is examining expected or unexpected inflation shocks, and the size and book values of the stocks. In general, a positive shock to expected and unexpected inflation has a favourable impact on stock returns during monetary expansion, but not during monetary tightening.

Inflation Hedging Through International Equity Investment

For years common stock were thought to be an effective inflation hedge. The dismal performance of domestic equities in the 1970s was, thus, completely unanticipated. A possible method for improving stock portfolio performance on a period-by-period basis vs. inflation would be the inclusion of foreign equities. Regression analysis of various foreign equity markets and internationally efficient portfolios vs. measures of actual, expected and unexpected inflation indicated that including non-US equities in portfolios did not protect investors from inflation on a period-by-period basis in the 1970-88 time period.

Inflation expectations: Does the market beat econometric forecasts?

The present paper compares expected inflation to (econometric) inflation forecasts based on a number of forecasting techniques from the literature using a panel of ten industrialized countries during the period from 1988 to 2007. To capture expected inflation, we develop a recursive filtering algorithm that extracts unexpected inflation from real interest rate data, even in the presence of diverse risks and a potential Mundell–Tobin-effect. The extracted unexpected inflation is compared to the forecasting errors of ten econometric forecasts. In addition to the standard AR(p) and ARMA(1,1) models, which are known to have the best performance on average, we also employ several Phillips curve-based approaches, VAR, dynamic factor models and two simple model averaging approaches. Finally, we show that the quality of the expectations clearly matches the quality of the forecasts derived with the techniques that are currently proposed for this purpose in the economic literature.

Can Timber Hedge against Inflation? An Analysis of Timber Prices in the US South

The US South is one of the world's leading timber producing regions. This article analyzes stumpage prices, the price a landowner receives for standing timber product, without the influence of growth or consideration of land price. Under the framework of Fisher's hypothesis and the real capital asset pricing model, we investigated stumpage prices' ability to hedge against inflation in 12 US southern timber regions using Timber Mart-South data. Prices for five major timber products, including pine sawtimber, hardwood sawtimber, pine pulpwood, hardwood pulpwood, and pine chip-n-saw, for each individual timber region and all regions combined were analyzed in a system by rolling regression and weighted least squares. Using instantaneous quarterly returns, no uniform conclusion could be drawn for either individual regions or the timber portfolio—the inflation hedging ability varied greatly by product and by time. Using 40-quarter average returns on the timber portfolio instead, it was found that pine pulpwood and chip-n-saw could hedge against both expected and unexpected inflation. Hence, stumpage prices alone should not be viewed as consistent or persistent hedges against inflation unless they are held for a long period.

The Impact of Expected and Unexpected Inflation on Local Currency and U.S. Dollar Returns from Foreign Equities

This article examines the impact of inflation on stock returns. We find that inflation that is expected is significantly positively related to local currency equity market returns while inflation that is unexpected is significantly negatively related to local currency equity market returns. In addition, our estimates show that unexpected increases in inflation have a negative impact on equity returns during the year that inflation increases unexpectedly, but a positive impact on subsequent years’ equity returns. The rationale is that the current years’ unexpected inflation becomes subsequent years’ expected inflation. With respect to the impact of inflation on a country’s FX rate relative to the U.S.dollar, we find that inflation that is expected is significantly negatively related to the local currency’s performance versus the U.S. dollar, while inflation that is unexpected is significantly positively related to the local currency’s performance versus the U.S. dollar. In the aggregate, after combining local currency equity market returns and FX returns, we find that countries with higher expected inflation tend to experience higher equity returns in U.S.dollar terms and that countries with higher unexpected inflation tend to experience lower equity returns in U.S.dollar terms. The results imply that U.S. investors should seek to invest in foreign countries with either high but stable inflation or with declining inflation. <b>TOPICS:</b>Equity portfolio management, global, factor-based models

FAKTOR MAKRO EKONOMI (VARIABEL CRR) PADA RETURN PORTOFOLIO PASAR SAHAM DI INDONESIA SAAT BULLISH DAN BEARISH

Stock market conditions in Indonesia since 1998 until 2008 is increasing with the 500 IDX Composite can be inflated into 2000s. This becomes interesting factor associated with macro-economic factors that affect the variabel CRR (Chen Roll and Ross). Researchers exam which we form portofiolio into 3 classes, large, medium, and large size companies from multiplying shares outstanding by its stock price. This research periodesasi long enough so that the portfolio is formed only by 15 issuers, this is caused by mergers or acquisitions from the issuer, the issuer is listed on the Stock Exchange from 1998-2008. However, with 11 years of data is very good for macro economic conditions in Indonesia. Independen variabels of this study consisted of changes in inflation expectations (DEIt), unexpected inflation (Uit), unexpected risk free rate (URFt), and the rate of economic growth (GMT) have a significant effect on portfolio return of capital market conditions are bullish for all forms of portfolio. Meanwhile, bearish market conditions only for the portfolio of small and large sizes only. Economic growth rate did not significantly affect the three portfolios in the bearish market conditions, this is because the movement of our stock in Indonesia is still largely influenced by foreign investors.

An Empirical Examination Of The Effects Of Inflation And Hedging On Investments In The U.S. Air Transport Sector Over The Period Since Deregulation

&lt;p class="MsoNormal" style="text-align: justify; margin: 0in 0.6in 0pt 0.5in;"&gt;&lt;span style="font-size: x-small;"&gt;&lt;span style="font-family: Times New Roman;"&gt;Research in economics and finance has documented a negative relationship between stock returns and inflation rates in most economies.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;The purpose of this study is to investigate this relationship for a particular specific sector investment, air transportation. A significant negative relationship is shown between the air equity index returns and unexpected inflation.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;Air equity returns, however, are found not be correlated with expected inflation.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;The Johansen and Juselius cointegration tests verify a long-run equilibrium between air transport equity index, general price levels, and the real economic activity. The short-run dynamics derived from the error-correction model, however,&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;do not support air transport equity index&amp;rsquo;s long-run inflation hedging ability. These findings indicate that investing in air transport equity index may not be a reliable hedge against inflation in the long- or short-run.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;In addition, the findings do not lend support for the Fisherian and Proxy hypotheses.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp;&amp;nbsp; &lt;/span&gt;&lt;/span&gt;&lt;/span&gt;&lt;/p&gt;

The structure of public debt and the choice of exchange rate regime

Abstract This paper explores the relationship between the denomination of public debt and the choice of exchange rate regime. Three types of debt (nominal, indexed, and foreign) and two regimes (fixed and flexible) are considered. Indexed debt is insulated against unexpected inflation. The real (domestic‐currency) value of foreign debt is subject to valuation effects from real exchange rate shocks. The ‘fear‐of‐floating’ result, that foreign debt makes pegging more attractive, is shown to hold unambiguously only if the peg is fully credible. If the peg lacks credibility, a critical factor is the perceived likelihood of using the ‘escape clause’ of a switch to a float, which raises the costs of pegging. Foreign debt increases the temptation to resort to the escape clause, so when a peg is not fully credible (as is almost always the case in reality), pegging tends to be less attractive than floating in the presence of foreign debt.

Inflation, Output, And Stock Prices: Evidence From Brazil

&lt;p class="MsoNormal" style="text-align: justify; margin: 0in 40.5pt 0pt 0.5in;"&gt;&lt;span style="mso-bidi-font-style: italic;"&gt;&lt;span style="font-size: x-small;"&gt;&lt;span style="font-family: Batang;"&gt;Research in economics and finance documents a puzzling negative relationship between stock returns and inflation rates in markets of industrialized economies.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;The present study investigates this relationship for Brazil. We show that the negative relationship between the real stock returns and unexpected inflation persists after purging inflation of the effects of the real economic activity.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp; &lt;/span&gt;The Johansen and Juselius cointegration tests verify a long-run equilibrium between stock prices, general price levels, and the real economic activity. Furthermore, stock prices and general price levels also show a strong long-run equilibrium with the real economic activity and each other.&lt;span style="mso-spacerun: yes;"&gt;&amp;nbsp;&amp;nbsp; &lt;/span&gt;The findings lend support to Fama&amp;rsquo;s proxy hypothesis in the long-run.&lt;/span&gt;&lt;/span&gt;&lt;/span&gt;&lt;/p&gt;

The inflation protection from indexed bonds

Indexed bonds provide protection against inflation if they are (i) insensitive to revisions of inflation expectations but (ii) adjust one-for-one to unexpected inflation. The sensitivity of British index-linked gilts to unexpected inflation is statistically significant and consistent with a unit response. This protection of British index-linked gilts against a loss of contemporaneous purchasing power is consistent with the view that indexed bonds avoid the inflation risk compensation of conventional bonds. This suggests that issuing indexed instead of conventional government bonds reduces the long-run funding costs of the public sector borrowing requirement.

Pensions, Debt and Inflation Risk in a Monetary Union

textabstractThis paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come.

Nominal versus indexed debt: A quantitative horse race

The main arguments in favor and against nominal and indexed debts are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.

Unanticipated Money Growth and GDP: Evidence from Korea

Nominal and real macroeconomic variables are traditionally linked by the expectational Phillips curve. There is evidence that changes in employment and output result from unanticipated changes in money stock and inflation. Unfortunately, expectations about money stock and prices are not observed. Previous literature estimates them using static models with a limited number of lagged variables. The possibility of omitting important factors or lags is substantial. This study uses a state-space model where expectations about money stock depend on the long history of macroeconomic variables and their distributions. Priors about the growth rate are updated using a Kalman filter method. Quarterly data on the Korean economy is used to infer the one-period-ahead expected money stock, price level and price of oil, and to estimate the relationship between the unanticipated money stock and growth of national output. The study controls for the determinants of aggregate supply and demand, money stock and inflation. The results show that a one-percent shock to Korea’s money stock increases national demand by 0.02%. The study confirms validity of the expectational Phillips curve between shocks to unemployment and the unexpected inflation rate.

Expected Inflation Rate and Equity Returns: New Perspectives from Market Efficiency with Weekly Data and the Option’s RHO

We examine the Fisher hypothesis with weekly equity returns and latently obtained simulated expected weekly inflation rates for five sectors in USA, Japan, UK, Canada and South Africa between Jan. 1975 and May 2009 and for several sub-periods, including that for the global financial crisis. Three main interdependent innovations define this paper. First, market efficiency, combined with noisy rational expectations equilibrium, posits an insignificant relation in data with a frequency that matches the frequency of the inflation announcements. Our evidence from estimations with monthly data supports this prediction. Second, new ideas, based on the option role of levered equity, indicate a dynamic, non-linear, and not one-for-one Fisher relation for equity returns and expected inflation rates. In particular, this interpretation emphasizes for the first time the effect of the changes in the aggregate amount of outstanding corporate debt on the Fisher hypothesis and also exposes the economic forces, other than the alluded market efficiency, that lead to insignificance. Third, a novel simulation-based approach with weekly data, when the inflation announcements occur monthly, examines empirically these option-theoretic arguments. We (i) introduce the Brownian Bridge to construct a reliable and simulated path of weekly inflation rates, (ii) extract its expected / unexpected inflation rate paths via the Kalman filter, and (iii) perform an estimation. This procedure is repeated 10,000 for each sector, country, and (sub-) sample period, leading to more than 1,250,000 estimations and rich distributions for the estimates. Our work stays clear of the concern for the power of the test, which is inherent in the long-horizon data of previous literature. Further, this approach captures the rich information in short-horizon return data. We find evidence in support of the option-theoretic arguments and offer an explanation for the dynamic changes in the signs and magnitudes of the coefficient estimates over time.

Inflation and stock returns

Stock returns, whether nominal or real, are commonly found to depend negatively on actual inflation, expected inflation and unexpected inflation. This runs contrary to the Fisher hypothesis generalised to apply to stocks, whereby stocks should be a hedge against inflation. However, another branch of finance, valuation theory, considers that the firm's equity is equal to the present value of future cash flows discounted at an appropriate market yield. Accordingly, if inflation is higher, the cash flows and the market yield are both adjusted upward, leaving the present worth unchanged. This present worth is the same if real (inflation-adjusted) cash flows are discounted at the real (inflation-adjusted) interest rate. Therefore valuation theory predicts that inflation is neutral on equity prices. This paper argues and presents evidence that this is indeed the case. When a fundamental variable, which is determined by a simple stock model, is included in the regressions, the effect of inflation on stock returns dissipates. Thus the observed negative relation between inflation and stock returns is due to a misspecification of the model. In reality, when the relation is properly formulated, inflation and stock returns are independent of each other.

Pensions, Debt and Inflation Risk in a Monetary Union

This paper investigates the international spillovers of government debt and the associated risk of inflation within a monetary union when countries have different pension systems. I use a stochastic two-country two-period overlapping-generations model, where one country has PAYG pensions and the other country has funded pensions. The paper shows that the PAYG country can shift part of its long-term debt burden to the funded country. Moreover, the PAYG country gains from unexpected inflation at the cost of the funded country. In response to these conflicting interests about inflation, inflation risk may rise with the level of debt in the PAYG country. Higher inflation risk harms both countries. Actually, in contrast to the debt burden, the PAYG country cannot share the negative effects of a rise in inflation risk with the funded country. The scenarios analysed might be especially relevant for the years to come.

Commercial Property as an Inflation Hedge: An Australian Perspective

There is ongoing interest in assets with inflation hedging capabilities, as many investors’ liabilities are linked directly or indirectly to inflation, which cannot be assumed to be forever benign. Numerous studies have shown that equity and bonds are poor at hedging inflation. In contrast, property presents itself as a candidate for this task, by virtue of rental structures that are linked to inflation.Though the intuition for property as an inflation hedge sounds encouraging, overseas experience has been mixed, and there is limited evidence for Australia. This paper applies established analytical approaches to Australian data for commercial property in examining its inflation hedging capabilities. It finds that Australian property at an aggregate level can provide a good hedge for both expected and unexpected inflation, even after allowing for the effect of tax in reducing investors ‘ returns.