Expected Inflation and Asset Returns

Abstract

There is a large body of literature on which assets are a good hedge against inflation. Most of these studies are concentrated on US or other developed countries. The present study has a wider focus; it examines the inflation hedging properties of three asset classes, namely common stocks, bonds and real estates for 45 countries, both developed and developing. The empirical results suggest that all the three classes of assets are not equally good as a hedge against inflation. Common stocks are found not a good hedge against inflation. As expected, bond returns are negatively associated with inflation, implying that they are also not a good hedge against inflation. However, contrary to the expectations, real estate is not found to be an inflation hedge in most countries. Further investigation of the issue with expected, rather than actual inflation, measured by ARIMA-based and Treasury-bill based models, provides mixed results. Overall, there is lack of significant and positive relationship between actual or expected inflation and asset returns.

Keywords: Expected inflation , asset returns