Inflation hedging and protection characteristics of infrastructure and real estate assets

Abstract

Purpose – Similar to real estate, infrastructure investments are regarded as providing a good inflation hedge and inflation protection. However, the empirical literature on infrastructure and inflation is scarce. Therefore, the purpose of this paper is to investigate the short- and long-term inflation-hedging characteristics, as well as the inflation protection associated with infrastructure and real estate assets. Design/methodology/approach – Based on a unique data set for direct infrastructure performance, a listed infrastructure index, common direct and listed real estate indices, the authors test for short- and long-term inflation-hedging characteristics of these assets in the USA from 1991-2013. The authors employ the traditional Fama and Schwert (1977) framework, as well as Engle and Granger (1987) co-integration tests. Granger causality tests are further conducted, so as to gain insight into the short-run dynamics. Finally, shortfall risk measures are applied to investigate the inflation protection characteristics of the different assets over increasingly long investment horizons. Findings – The empirical results indicate that in the short run, only direct infrastructure provides a partial hedge against inflation. However, co-integration tests suggest that all series have a long-run co-movement with inflation, implying a long-term hedge. The causality tests reveal reverse unidirectional causality – while real estate asset returns are Granger-caused by inflation, infrastructure asset returns seem to cause inflation. These findings further confirm that both assets represent a distinct asset class. Ultimately, direct infrastructure investments exhibit the most desirable inflation protection characteristics among the set of assets. Research limitations/implications – This study only presents results based on a composite direct infrastructure index, as no sub-indices for sub-sectors are available yet. Practical implications – Investors seeking assets that are sensitive to inflation and mitigate inflation risk should consider direct infrastructure investments in their asset allocation strategy. Originality/value – This is the first study to examine the ability of direct infrastructure to assess inflation risk.

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A fresh look at the inflation-hedging attributes of residential property investments in emerging markets: evidence from Nigeria

“…Apart from eroding the worth of business accruals, inflation lowers the strength of an investor's capital and significantly reduces the return-risk performance of assets (Peyton, 2011). During inflationary periods, it has been established that certain investment assets fail to protect investors from the ravages of inflation (Ruben et al, 1989;Hoesli et al, 2008;Wurstbauer and Schafers, 2015;Donovan, 2017). Hence, it is pertinent for investors to establish the performance of an asset against inflation before making asset allocation decisions.…”

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