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The long‐term inflation hedging effectiveness of real estate and financial assets: A New Zealand investigation

Abeyratna Gunasekarage (Department of Accountancy, Finance and Information Systems, University of Canterbury, Christchurch, New Zealand)
David M. Power (School of Accounting and Finance, University of Dundee, Dundee, UK)
Ting Ting Zhou (Hamilton, New Zealand)

Studies in Economics and Finance

ISSN: 1086-7376

Article publication date: 3 October 2008

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Abstract

Purpose

The purpose of this paper is to examine the long‐term relationship between the rate of inflation and the returns of real estate and financial assets traded in New Zealand markets.

Design/methodology/approach

The question of whether these assets are good candidates to hedge inflation in the long run is addressed employing cointegration and causality tests on quarterly data for the period from December 1979 to December 2003.

Findings

A strong long‐term relationship was found between the returns offered by all types of real estate assets (i.e. residential, commercial, industrial and farm building) and the rate of inflation. However, such a long run relationship is not detected between the rate of inflation and the returns of financial assets (i.e. stocks, short‐term bills and long‐term bonds).

Research limitations/implications

The empirical findings reveal that the direction of causality is from inflation to real estate assets indicating that changes in property prices do not cause inflation in New Zealand; the cause of inflation is independent of the price movements for real estate assets. The real estate assets are found to offer an effective hedge against inflation in the long run. The same cannot be said for the financial assets, however.

Originality/value

This is the first New Zealand study which investigates the long‐term inflation hedging effectiveness of both real estate and financial assets. The findings should be of interest to most of the investors in New Zealand as the real estate assets play a significant role in their portfolio decisions.

Keywords

Citation

Gunasekarage, A., Power, D.M. and Ting Zhou, T. (2008), "The long‐term inflation hedging effectiveness of real estate and financial assets: A New Zealand investigation", Studies in Economics and Finance, Vol. 25 No. 4, pp. 267-278. https://doi.org/10.1108/10867370810918155

Publisher

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Emerald Group Publishing Limited

Copyright © 2008, Emerald Group Publishing Limited

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