Inflation risk revisited : The hedging properties of major asset classes

Abstract: This paper is in large parts an update to a paper by Bekaert and Wang from 2010 called Inflation risk and the inflation risk premium. Its purpose is to find insights into the inflation hedging properties of the major asset classes. The analysis includes stocks, bonds, treasury bills, foreign bonds, real estate, gold, and gold futures for 43 countries and covers investment horizons up to five years. For developed countries it is found that gold, gold futures and bonds are the besthedge against inflation, both in the short and long run. Treasury bills have a relatively modest performance in the short term but improve with horizons to a great hedge. For emerging countries all asset classes provide a decent hedge, with a slight favor for treasury bills and a slightdisadvantage for real estate in the short and long run. All asset classes are poor hedges to unexpected inflation with an exception for real estate in longer investment horizons. The best hedge against unexpected inflation shocks is inflation-linked bonds.