Wednesday 10 November 2021, 1.00PM to 2:00pm
Speaker(s): Thomas Maurer (Hong Kong Uni)
Abstract: We use regularized Engle-Granger (1987) co-integration regressions to investigate the long-run co-movement between asset prices and the U.S. consumer price index (CPI). Correlations between asset returns and inflation are close to zero at short horizons. However, in our out-of-sample analysis we confirm that portfolios of (local) stocks or bonds are strongly co-integrated with the CPI. Moreover, we document weakly significant co-integration relations between the CPI and real estate and commodities. In contrast, we do not find evidence that foreign exchange rates or international stocks co-move with the U.S. CPI in the long run. Based on our co-integration analysis, we construct a strategy that hedges inflation shocks. The strategy features stationary hedging errors, and the mean-reversion of the errors has a half-life of 8 months. The average excess return of the hedging portfolio is close to zero, which is consistent with estimates of the inflation risk premium in the literature. However, we further document a significant time-series variation in this premium, ranging between -1% and +0.5% per annum.
Host: Kostas Koufopoulos
Location: Zoom - details to follow
Admission: All welcome