The Inflation Hedging Characteristics of U.S. And U.K. Investments: A Multi-Factor Error Correction Approach

57 Pages Posted: 21 Jun 2006

See all articles by Martin Hoesli

Martin Hoesli

University of Geneva - Geneva School of Economics and Management (GSEM); Swiss Finance Institute; University of Geneva - Research Center for Statistics; University of Aberdeen - Business School

Colin Lizieri

University of Cambridge - Department of Land Economy

Bryan MacGregor

University of Aberdeen - Centre for Property Research

Abstract

Historic analysis of the inflation hedging properties of stocks has produced anomalous results, with stocks often appearing to offer a perverse hedge against inflation. This has been attributed to the impact of real and monetary shocks to the economy, which influence both inflation and asset returns. It has been argued that real estate should provide a better hedge: however, empirical results have been mixed. This paper explores the relationship between commercial real estate returns (from both private and public markets) and economic, fiscal and monetary factors and inflation for U.S. and U.K. markets. Comparative analysis of general equity and small capitalization stock returns in both markets is carried out. Inflation is divided into expected and unexpected components using a variety of estimation techniques. The analyses are undertaken using the error correction approach. In the long run, once real and monetary variables are included, asset returns are positively linked to anticipated inflation but not to inflation shocks. Adjustment processes are, however, gradual and not within period. Real estate returns, particularly private market returns, exhibit characteristics that differ from those of stocks.

Keywords: Investment Returns, Real Estate, Inflation Hedging, Error Correction Model

JEL Classification: G12, R33

Suggested Citation

Hoesli, Martin Edward Ralph and Lizieri, Colin M. and MacGregor, Bryan D., The Inflation Hedging Characteristics of U.S. And U.K. Investments: A Multi-Factor Error Correction Approach. Journal of Real Estate Finance and Economics, Vol. 38, No. 2, 2008; Swiss Finance Institute Research Paper No. 06-4. Available at SSRN: https://ssrn.com/abstract=910225

Martin Edward Ralph Hoesli (Contact Author)

University of Geneva - Geneva School of Economics and Management (GSEM) ( email )

40 Boulevard du Pont d'Arve
Geneva 4, 1211
Switzerland
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

University of Geneva - Research Center for Statistics ( email )

Geneva
Switzerland

University of Aberdeen - Business School ( email )

Edward Wright Building
Dunbar Street
Aberdeen, Scotland AB24 3QY
United Kingdom
+41 22 379 8122 (Phone)
+41 22 379 8104 (Fax)

Colin M. Lizieri

University of Cambridge - Department of Land Economy ( email )

19 Silver Street
Cambridge, CB3 9EP
United Kingdom

HOME PAGE: http://www.landecon.cam.ac.uk/staff/profiles/clizieri.htm

Bryan D. MacGregor

University of Aberdeen - Centre for Property Research ( email )

Aberdeen AB24 2UF
Scotland
44-1224-272-356 (Phone)
44-1224-273-487 (Fax)

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