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The Inflation-Hedging Properties of Risk Assets: The Case of REITs

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    Abstract

    This study examines the inflation-hedging abilities of REITs over the period 1972:2-1992:12 to determine whether REITs act as a hedge against expected and/or unexpected inflation. The time period used in this study is substantially longer than in earlier studies. A model of real estate returns is derived that has components for expected and unexpected returns and allows for variation in the real return on risky assets. The results indicate that REITs provide some hedging capability against expected inflation, but act as perverse hedges against unexpected inflation. These results are robust with respect to time period studied, measure of expected inflation and proxy for the market portfolio, indicating that the apparent perverse hedging property of real estate investments is not due to methodological problems.

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    File URL: http://aux.zicklin.baruch.cuny.edu/jrer/papers/pdf/past/vol10n03/v10p279.pdf
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    Bibliographic Info

    Article provided by American Real Estate Society in its journal Journal of Real Estate Research.

    Volume (Year): 10 (1995)
    Issue (Month): 3 ()
    Pages: 279-296

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    Handle: RePEc:jre:issued:v:10:n:3:1995:p:279-296

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    Postal: American Real Estate Society Clemson University School of Business & Behavioral Science Department of Finance 401 Sirrine Hall Clemson, SC 29634-1323
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    Web page: http://www.aresnet.org/

    Order Information:
    Postal: Diane Quarles American Real Estate Society Manager of Member Services Clemson University Box 341323 Clemson, SC 29634-1323
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    Web: http://aux.zicklin.baruch.cuny.edu/jrer/about/get.htm

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    1. Menil, George & Bhalla, Surjit S, 1975. "Direct Measurement of Popular Price Expectations," American Economic Review, American Economic Association, vol. 65(11), pages 169-80, March.
    2. Bodie, Zvi, 1976. "Common Stocks as a Hedge against Inflation," Journal of Finance, American Finance Association, vol. 31(2), pages 459-70, May.
    3. Paul H. Goebel & Kee S. Kim, 1989. "Performance Evaluation of Finite-Life Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 4(2), pages 57-70.
    4. Willard McIntosh & Youguo Liang & Daniel L. Tompkins, 1991. "An Examination of the Small-Firm Effect within the REIT Industry," Journal of Real Estate Research, American Real Estate Society, vol. 6(1), pages 9-18.
    5. K. C. Chan & Patric H. Hendershott & Anthony B. Sanders, 1990. "Risk and Return on Real Estate: Evidence from Equity REITs," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 18(4), pages 431-452.
    6. Jack H. Rubens & Michael T. Bond & James R. Webb, 1989. "The Inflation-Hedging Effectiveness of Real Estate," Journal of Real Estate Research, American Real Estate Society, vol. 4(2), pages 45-56.
    7. Mandelker, Gershon & Tandon, Kishore, 1985. "Common stock returns, real activity, money, and inflation: Some international evidence," Journal of International Money and Finance, Elsevier, vol. 4(2), pages 267-286, June.
    8. Carmelo Giaccotto & John Clapp, 1992. "Appraisal-Based Real Estate Returns under Alternative Market Regimes," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 20(1), pages 1-24.
    9. K.C. Chen & Daniel D. Tzang, 1988. "Interest-Rate Sensitivity of Real Estate Investment Trusts," Journal of Real Estate Research, American Real Estate Society, vol. 3(3), pages 13-22.
    10. Jaffe, Jeffrey F & Mandelker, Gershon, 1976. "The "Fisher Effect" for Risky Assets: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 31(2), pages 447-58, May.
    11. Geltner, David Michael, 1991. "Smoothing in Appraisal-Based Returns," The Journal of Real Estate Finance and Economics, Springer, vol. 4(3), pages 327-45, September.
    12. Gultekin, N Bulent, 1983. " Stock Market Returns and Inflation Forecasts," Journal of Finance, American Finance Association, vol. 38(3), pages 663-73, June.
    13. Fogler, H Russell & Granito, Michael R & Smith, Laurence R, 1985. " A Theoretical Analysis of Real Estate Returns," Journal of Finance, American Finance Association, vol. 40(3), pages 711-19, July.
    14. Fama, Eugene F, 1975. "Short-Term Interest Rates as Predictors of Inflation," American Economic Review, American Economic Association, vol. 65(3), pages 269-82, June.
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    Cited by:
    1. Arjun Chatrath & Youguo Liang, 1998. "REITs and Inflation: A Long-Run Perspective," Journal of Real Estate Research, American Real Estate Society, vol. 16(3), pages 311-326.
    2. Christopher T. Downing & Francis A. Longstaff & Michael A. Rierson, 2012. "Inflation Tracking Portfolios," NBER Working Papers 18135, National Bureau of Economic Research, Inc.

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