A Comparative Analysis of Inflation Hedging Characteristics of Real Estate and Financial Assets in Colombo

Abstract

The general objective of this study is to comparatively analyse the inflation hedging characteristics of real estate and financial asset in Colombo. Three specific objectives were stated to achieve the above objective. First objective is to examine the inflation hedging ability of the real estate against actual, expected and unexpected inflation. Second is to examine the inflation hedging ability of the financial assets against actual, expected and unexpected inflation. Finally compare the inflation hedging ability of real and financial assets. Residential and commercial properties are taken for real estate and treasury bill and stock are used to represent the financial assets. Farna and Schewert 1977 framework and regression analysis is employed to analyse the data. The results support that residential properties are performed as good hedgers than commercial properties against actual inflation. Among the financial assets t-bills are performed as good hedgers than stocks against actual inflation. Since regression coefficients of all assets except stocks are less than 1, all assets are partially hedge against actual inflation. When expected and unexpected inflation are concerned t-bills are performed good hedgers against expected inflation while residential property plays best against unexpected inflation. Stocks are not hedgers against both expected and unexpected inflation.