Inflation hedging: a comparative wavelet quantile correlation analysis of real estate and alternative assets
| Date | 02 October 2024 |
| Pages | 66-82 |
| DOI | https://doi.org/10.1108/JPIF-04-2024-0047 |
| Published date | 02 October 2024 |
| Subject Matter | Property management & built environment,Real estate & property,Property valuation & finance |
| Author | Aya Nasreddine,Yasmine Essafi Zouari |
Inflation hedging: a comparative
wavelet quantile correlation
analysis of real estate and
alternative assets
Aya Nasreddine
CEROS, Universit�
e Paris Nanterre, Nanterre, France, and
Yasmine Essafi Zouari
M�
etis Lab, EM Normandie Business School, Dubaı€, UAE
Abstract
Purpose –Conducting an analysis spanning from 2000 to 2023, this research evaluates the effectiveness of
real estate assets in hedging against global and energy inflation, benchmarked against other compelling
investment options such as oil, gold, silver and stocks.
Design/methodology/approach –This study employs the wavelet quantile correlation (WQC)
methodology. The latter sheds light on dynamic market interactions by scrutinising dependency structures
across multiple time scales and also by capturing tail dependence. The adaptability of the wavelet transform,
across a spectrum of frequencies, emerges as an indispensable tool for studying time series while also
unravelling relationships among variables across diverse quantiles.
Findings –The findings reveal that the response to inflationary pressures is contingent upon the asset class,
investment horizon and type of inflation under consideration. While precious metals demonstrate
effectiveness over short-term horizons, French-listed real estate exhibits compelling inflation-hedging
characteristics as the investment horizon extends. Oil emerges as an unequivocal hedge against both global
and energy inflation.
Practical implications –To counteract the effects of inflation, investors and households may feel compelled
to refine their investment strategies, opting to bolster their portfolios with instruments proven to serve as
reliable safeguards against inflation, as indicated by this study.
Originality/value –In conjunction with a surge in inflationary pressures, this study delves into the hedging
capabilities of assets, exploring their efficacy not only across short- and long-term investment horizons but
also within diverse scenarios characterized by fluctuating levels of global and energy-related inflation. To the
best of our knowledge, no previous article employed the WQC technique to evaluate the inflation-
hedging nexus.
Keywords Inflation hedging, Real estate, REITs, Precious metals, Oil, Wavelet, Quantile correlation,
Investment horizon
Paper type Research paper
1. Motivation
Inflation, a pivotal macroeconomic factor, profoundly influences economic stability, growth,
and the welfare of households, investors and nations alike. It is quantified by the upward
trajectory in the prices of goods and services over time, triggered by diverse economic
stimuli. Globalization and technological advancements, fostering resources accessibility,
efficient production and heightened competition, contributed to a prolonged era of low
inflation in many parts of the world. However, since 2019, numerous countries have
JPIF
43,1
66
JEL Classification — G11, G15, E31
We extend our sincere gratitude to the Louis Bachelier Institute and the REFINE network for
funding our project and fostering research in the field of real estate finance. Additionally, we would like
to express our appreciation to our colleague, Dr Anoop S Kumar, for his invaluable support in
implementing the WQC methodology.
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1463-578X.htm
Received 4 April 2024
Revised 15 June 2024
Accepted 12 July 2024
Journal of Property Investment &
Finance
Vol. 43 No. 1, 2025
pp. 66-82
© Emerald Publishing Limited
1463-578X
DOI 10.1108/JPIF-04-2024-0047
experienced an upward surge in inflation driven by a confluence of factors, including the
Covid-19 pandemic, associated lockdowns, supply chain disruptions, geopolitical tensions
and conflicts, all contributing to considerable market instability. In this scenario, inflation
emerges as a substantial concern for investors. Moreover, over the long term, whether
inflation rates are high or low, they inevitably affect portfolio values and the purchasing
power of households. In particular, long-term investors, prioritizing wealth preservation,
seek to hold effective inflation hedging assets and are inclined to adjust their strategies by
increasing their exposure to instruments that historically provided a better hedge against
inflation. Understanding the potential of these instruments to act as safeguards against
inflation is crucial for investors aiming to secure their portfolios and maintain their
purchasing power. While the capacity of different asset classes to serve as effective inflation
hedges has garnered significant attention in the academic literature, many studies suffer
from a lack of methodological accuracy due to the use of conventional econometrical
methods. Our study addresses this concern by employing the wavelet quantile correlation
(WQC) methodology, which proves particularly relevant for handling non stationarity and
multiscale analysis.
Traditionally, physical commodities, such as precious metals, are considered to be safe-
haven as well as store-value assets, as they increase their value during crisis periods (Bilgin
et al., 2018;Lahiani et al., 2021). Undoubtedly, gold has retained its status of a trusted hedge
against inflation. Thanks to its dual potential as a hedge against both inflation and stock
market risk (Baur and Lucey, 2010), gold appears to be a popular choice also among other
types of investors. Chen (2020) found that gold was positively correlated with inflation and
negatively correlated with stock market returns, highlighting thus the potential of gold to act
as a buffer against inflationary pressure and market volatility. This finding is corroborated
by Baur et al. (2020). When it comes to the inflation hedging properties of stocks, the majority
of studies reported a negative relationship between inflation and stock return according to
Madadpour and Asgari (2019). This poor hedging ability result is corroborated by authors
such as, to name few, Saunders and Tress (1981) for Australia, Al-Sharkas (2004) for Humpe
and Macmillan (2009) for Japan and USA, Essafi Zouari and Nasreddine (2024) for France. In
contrast, other studies found that stocks can serve as a hedge against inflation, although their
relationship with inflation risk is nonconstant and may fluctuate over time (Antonakakis et al.,
2017). Other financial assets can be considered: Inflation-linked bonds and Treasury Inflation-
Protected Securities (TIPS) that protect against inflation (Westerhout and Ciocyte, 2017). More
recently, with the emergence of cryptocurrencies, investors are increasingly keen to use this
digital asset, considering it as a potential safe-haven despite their high price volatility. F�elez-
Vi~
nas et al. (2021) highlighted the anti-inflationary characteristics of cryptocurrencies that
make them a good alternative to gold as a digital long-term store of value. However, Smales
(2024) found that the returns of various cryptocurrencies are significantly and positively
correlated only with the US short term and low inflation expectations.
Delving deeper into the realm of inflation hedging, real estate has risen as a particularly
compelling sector in the fight against inflation. Several studies have conducted comparative
analyses of real estate alongside other asset classes to assess their efficacy as inflation
hedges. For instance, when comparing real estate to gold, Salisu et al. (2020) highlighted the
higher and robust inflation-hedging characteristics of real estate, positioning it as a resilient
safeguard against the effects of inflation. However, hedging characteristics of real estate
appear to depend on factors such as the localization of properties, considered methodology,
type of real estate (direct or indirect), and vary across inflation components (expected,
unexpected and actual inflation).Furthermore, inflation hedging ability is also evolving
according to the studied period. Fuertes Mendoza (2023) highlighted that in the current
inflationary episode, real estate (represented by US residential market) has well performed,
while it has presented previously negative real returns indicating a lower hedging capacity
Journal of
Property
Investment &
Finance
67
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