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Real Estate versus Financial Asset Returns and Inflation: Can a P* Trading Strategy Improve REIT Investment Performance?

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Abstract

The ability of a financial or real asset to provide a rate of return above the rate of inflation is crucial to investors. The financial literature on the inflation-hedging effectiveness of various investments suggests that real estate acts as a hedge against inflation on a period-by-period basis, while financial assets do not. Given this, an investor who could accurately forecast changes in inflation, and therefore alter his/her investment portfolio between real estate and financial assets, should be able to significantly improve portfolio returns. Recently, a new method of measuring potential inflation has been developed by the Federal Reserve Board. Dubbed P*, it relates long-run spending in the economy to long- run output and gives an implied value for future inflation. In this study, the accuracy of P* in forecasting prices is compared to conventional forecasts of inflation. The P* variable is then used to generate a decision rule for investors in terms of holding financial assets (which performs well in periods of low or falling inflation) and real estate (which has been identified as an asset that behaves as an effective hedge against inflation). The results for this strategy are then contrasted with the performance of selected assets under a simple buy-and -hold strategy.

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  • Michael T. Bond & James R. Webb, 1995. "Real Estate versus Financial Asset Returns and Inflation: Can a P* Trading Strategy Improve REIT Investment Performance?," Journal of Real Estate Research, American Real Estate Society, vol. 10(3), pages 327-334.
    • Handle: RePEc:jre:issued:v:10:n:3:1995:p:327-334
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    References listed on IDEAS

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    1. Nelson, Charles R, 1976. "Inflation and Rates of Return on Common Stocks," Journal of Finance, American Finance Association, vol. 31(2), pages 471-483, May.
    2. Martin Feldstein, 1983. "Inflation and the Stock Market," NBER Chapters, in: Inflation, Tax Rules, and Capital Formation, pages 186-198, National Bureau of Economic Research, Inc.
    3. Gultekin, N Bulent, 1983. "Stock Market Returns and Inflation Forecasts," Journal of Finance, American Finance Association, vol. 38(3), pages 663-673, June.
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    Cited by:

    1. Riza Demirer & Rangan Gupta & Asli Yuksel & Aydin Yuksel, 2020. "The US Term Structure and Return Volatility in Global REIT Markets," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(3), pages 84-109, September.
    2. Vadim Ye. Zyamalov, 2017. "Comparison of the Predictive Ability of Single and Multi-Regime Models of Stock Market Dynamics," Finansovyj žhurnal — Financial Journal, Financial Research Institute, Moscow 125375, Russia, issue 2, pages 64-75, April.
    3. William G. Hardin, III & Marvin L. Wolverton, 1999. "Equity REIT Property Acquisitions: Do Apartment REITs Pay a Premium?," Journal of Real Estate Research, American Real Estate Society, vol. 17(1), pages 113-126.
    4. Shakizada Niyazbekova & Igor Grekov & Tatiana Blokhina, 2016. "The Influence Of Macroeconomic Factors To The Dynamics Of Stock Exchange In The Republic Of Kazakhstan," Economy of region, Centre for Economic Security, Institute of Economics of Ural Branch of Russian Academy of Sciences, vol. 1(4), pages 1263-1273.
    5. Robert Johnson, 2000. "Monetary policy and real estate returns," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 24(3), pages 283-293, September.
    6. Riza Demirer & Rangan Gupta & Asli Yuksel & Aydin Yuksel, 2020. "The US Term Structure and Return Volatility in Global REIT Markets," Advances in Decision Sciences, Asia University, Taiwan, vol. 24(3), pages 84-109, September.

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    JEL classification:

    • L85 - Industrial Organization - - Industry Studies: Services - - - Real Estate Services

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