Inflation Hedging Potential of Infrastructure Sector and Sub-Sector Returns—Evidence from Emerging Markets

Abstract

This article tests the inflation hedging ability of infrastructure investments in both the short and long run in four of the major emerging markets. Based on the Generalized Fisher Hypothesis (GFH), we use Fama and Schwert’s framework and Granger causality tests for short-term insights, and Engle and Granger co-integration for a long run analysis, to examine the inflation hedging effectiveness of various listed indexes (composite infrastructure, energy, communication, utilities, common stock, and property). The findings indicate that infrastructure and its sub-sectors constitute a more effective hedge against inflation in the long run than in the short run. The empirical results also stress the presence of an inherent heterogeneity within the infrastructure sector, and suggest that real estate and infrastructure should be considered separately in investors’ portfolios. Our results have implications for investors, including institutional and retail, provided they have longer investment horizons, and for other market players to see infrastructure in the light of a unique asset class.