Do Asset Returns Hedge Against Inflation in Pakistan

Abstract

This paper attempts to explore an empirical relationship between asset returns and inflation in Pakistan. Using simple Foreign currency, gold, real estate, saving deposits, silver, stock prices, treasury bills, and government securities are considered as asset. To establish the relationship between asset return and inflation the study uses the annual data from 1972 to 2006 using OLS techniques. The empirical results indicate that most of the asset returns are hedged expected inflation. None of the asset returns are hedging unexpected inflation and total inflation. However, the treasury bills and government securities are significant to total and unexpected inflation, but the coefficients are less than one. The stock prices and gold prices neither hedge to total inflation nor expected and unexpected inflation. The reason is that the individuals are used gold for precautionary purpose not for hedging against inflation. For stock prices the reasons may be the people are not interested to invest in risky assets. A matter of fact is that a significant relationship exists between un-expected inflation and assets in various cases but slope coefficients are less than one and therefore are not hedges against inflation. The Pakistani investors are interested in risk free investment and not risky investment.