JultikaUniversity of Oulu repository

Abstract

Purpose of the research is to get evidence how returns on assets are related against inflation. In other words, idea is to find out if some assets can offer hedge against inflation. More specifically, aim of the study is to get global evidence of hedging ability of assets against inflation in the long run. Moreover, this research presents findings how assets are related with inflation in different time periods. Additionally, this study shows how returns on assets react against inflation shocks.

First of all, this study points out how nominal and real returns differ from each other between different asset classes. Then, autocorrelation is tested for nominal and real returns. Existence of unit-roots is tested by using ADF-, PP- and KPSS-test. Basic OLS estimation is used to get evidence how returns on assets are related against inflation. More deeply, ARIMA model shows how returns on assets are related against expected and unexpected inflation. Quantile regression presents how returns on assets behave against inflation in different quantiles. Finally, VAR analysis is used to get information of Granger causality, impulse-response function and cointegration.

The results show clearly that Goldman Sachs Commodity Index offers the best hedge against inflation. In fact, Goldman Sachs Commodity Index offers hedge against both, expected and unexpected inflation in the long run. However, quantile regression and periodic analysis show that even Goldman Sachs Commodity Index cannot offer hedge against inflation during extremely high inflation periods. On the other hand, gold seems to offer at least partial hedge against inflation during high inflation periods. REITs can offer partial hedge against inflation, but the hedge does not hold when the rate of inflation is high. Interestingly, stocks cannot offer hedge against inflation in the long run. However, in the case when the rate of inflation is low, stocks seems to offer at least partial hedge against inflation. Interest rates are positively related with inflation, but cannot offer any hedge against it. Finally, bonds are the worst assets against inflation, but U.S TIPS can offer some hedge.

Generally speaking, these results show clearly that when investment decisions are done between different asset classes, the rate of inflation should be taken into consideration with high importance. More specifically, the rate of inflation can be extremely harmful for the returns on assets. Finally, it should be noted that the results show that different asset classes react completely differently against inflation.