[Work in progress] Cointegration and regression analyses as alternative methods to verify the protective properties of inflation hedge investments.

Abstract

In the face of rising inflation, a variety of financial tools are increasingly important to protect capital from loss of value. In such a context, questions arise not only about what is worth investing in in order to achieve investment returns that follow the rate of inflation but also how to verify which investment is an inflation hedger. This leads to questions about which investment to choose and how to check whether its historical returns have allowed the capital to be protected from loss of value. However, some experts point out that this type of analysis is not straightforward and the outcome of the analysis may depend on the research method adopted.

Aim: to determine whether selected investment directions on the Polish capital market are able to protect capital against inflation-related loss of value.

Methodology: the study used two approaches, cointegration analysis and regression analysis, The first step was to analyse distributions and calculate correlations between investments. This was followed by a cointegration analysis using the Engle-Granger test and a regression analysis using the OLS method. The study covered the period from Q4 2008 to Q4 2022. The following assets were used for the analysis: the TBSP index from the bond market, Bitcoin and gold quotes quoted in PLN, the WIG index from the Warsaw Stock Exchange, the WIG Real Estate stock index and the NBP hedonic index of property prices in the seven largest cities in Poland. These investments were related to the HICP harmonised inflation index published by the European Statistical Office (EUROSTAT).

Findings: The analysis carried out revealed different results depending on the survey methodology adopted. The co-integration analysis pointed to Bitcoin as an inflation hedging investment. On the contrary, the regression analysis pointed to gold and residential property as inflation combined.

Implications: For researchers, the application of cointegration and regression analyses offers a robust framework to empirically examine the long-term relationships and protective properties of various inflation hedge investments, enabling them to better understand the complex dynamics involved in preserving purchasing power during periods of high inflation. For investment practitioners, the implications of this study are equally significant, as it equips them with a more comprehensive understanding of the suitability of various inflation hedge investments, empowering them to make more informed decisions in constructing and managing portfolios.

Originality/value: The study is an important contribution to the gaps in the Polish market in terms of analysis of capital protection options against inflation. Although the study focused only on the Polish market, this topic has not been addressed through a period of low inflation, also in mature economies. Additionally, the study allowed for a comparison of the results obtained with different research methods.