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Abstract. We examine whether REITs provide an inflation hedge in the long run. We also investigate whether the apparent lack of a positive relationship between general prices and REIT returns in prior studies arises from the impact that stock market movements have on REITs. As in most prior research, regression analysis provides no evidence that REIT returns are positively related to temporary or permanent components of inflation measures. We rule out the possibility that a stock market-induced proxy effect is the cause for the apparent lack of relationship between REITs and inflation. On the other hand, we find some evidence that REITs provide a long-run inflation hedge. Johansen (1988) tests for cointegration isolate cointegrating vectors between alternate REIT indices and the CPI over the 1972-95 interval. However, the more standard residual-based cointegration techniques failed to provide similar evidence.
Introduction
Several researchers have suggested that real estate investment trusts (REITs) tend to behave like other equities with respect to their inflation-hedging characteristics. It is now well documented that stock returns in the United States and several other countries are either unrelated or negatively related to inflation, inconsistent with the Fisher (1930) hypothesis (e.g., Bodie, 1976; Jaffe and Mandelker, 1976; Fama and Schwert, 1977; Fama, 1981; Geske and Roll, 1983; Mandelker and Tandon, 1985; and Stulz, 1986). Most studies on the relationship between REIT returns and inflation arrive at similar conclusions (Murphy and Kleiman, 1989; Chan, Hendershott and Sanders, 1990; Park, Mullineaux and Chew, 1990; and Yobaccio, Rubens and Ketcham, 1995). Only a few studies, such as Gyourko and Linneman (1988) and Chen and Tzang (1988), indicate that REITs possess some inflation-hedging properties. Gyourko and Linneman document that REITs provide a partial hedge against the inflation rate derived from the Consumer Price Index (CPI) adjusted for the Home Purchase Price component. However, the authors also find that REITs act as a perverse hedge against unexpected inflation. Chen and Tzang find that REITs have some ability to hedge the expected component of inflation.1
The evidence from unsecuritized real estate has been far more favorable. For instance, Hartzell, Heckman and Miles (1987) document that a portfolio of commercial real estate provided an effective hedge against inflation over the 1973-83 interval.2 An earlier study by Fama and Schwert (1977)...