Working Paper: NBER ID: w17798
Authors: Andrew Ang; Marie Brire; Ombretta Signori
Abstract: We study the inflation hedging ability of individual stocks. While the poor inflation hedging ability of the aggregate stock market has long been documented, there is considerable heterogeneity in how individual stock returns covary with inflation. Stocks with good inflation-hedging abilities since 1990 have had higher returns, on average, than stocks with low inflation betas and tend to be drawn from the Oil and Gas and Technology sectors. However, we show that there is substantial time variation of stock inflation betas. This makes it difficult to construct portfolios of stocks that are good inflation hedges out of sample. This is true for portfolios constructed on past inflation betas, sector portfolios, and portfolios constructed from high-paying dividend stocks.
Keywords: Inflation; Equities; Hedging; Stock Returns
JEL Codes: G11; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| some stocks serve as good inflation hedges (G10) | overall market remains a poor hedge (G19) |
| time variation of inflation betas (E31) | complexity in constructing effective inflation hedges (F31) |
| inflation (E31) | individual stock returns (G12) |
| high inflation betas (E31) | higher average returns (G11) |
| stocks with good inflation hedging properties (G13) | high nominal and real returns (G19) |