Inflation-Hedging, Asset Allocation, and the Investment Horizon

Posted: 24 Aug 2010

See all articles by Benedikt Fleischmann

Benedikt Fleischmann

University of Regensburg - International Real Estate Business School (IREBS)

Christian Rehring

University of Regensburg - International Real Estate Business School (IREBS)

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS)

Date Written: August 15, 2010

Abstract

Focusing on the role of the investment horizon, we analyze the inflation-hedging abilities of stocks, bonds, cash and direct commercial real estate investments. Based on vector autoregression for the UK market we find that the inflation-hedging abilities of all assets improve with the investment horizon. For long horizons, real estate seems to hedge unexpected inflation as well as cash. This has implications for the difference between the return volatility of real returns versus the return volatility of nominal returns, and ultimately for portfolio choice. Portfolio optimizations based on real returns yield higher allocations to cash and real estate than optimizations based on nominal returns. Bonds tend to be less attractive for an investor taking into account inflation. Switching from nominal to real returns, the allocation to stocks is decreasing at medium investment horizon, but increasing at long horizons.

Keywords: Inflation-hedging, Asset allocation, Investment horizon, Vector autoregression

JEL Classification: E31, G11, G17

Suggested Citation

Fleischmann, Benedikt and Rehring, Christian and Sebastian, Steffen P., Inflation-Hedging, Asset Allocation, and the Investment Horizon (August 15, 2010). Available at SSRN: https://ssrn.com/abstract=1663590

Benedikt Fleischmann (Contact Author)

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany

Christian Rehring

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany

Steffen P. Sebastian

University of Regensburg - International Real Estate Business School (IREBS) ( email )

Universitaetsstrasse 31
Regenburg, Bavaria 93040
Germany
+49(941)943-5081 (Phone)
+49(941)943-5082 (Fax)

HOME PAGE: http://www.irebs.de

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