Asset allocation and inflation hedging strategies: Thai applications

Date: 3 July 2014

Venue: University of Antwerp, Promotiezaal Grauwzusters - Lange Sint-Annastraat 7 - 2000 Antwerp

PhD candidate: Dalina Amonhaemanon

Principal investigator: Prof Jan Annaert

Short description: PhD defense Dalina Amonhaemanon - Faculty of Applied Economics

Abstract: This dissertation is dedicated to seeking answers for the question 'Is it reasonable to invest in Thai real estate?' We empirically investigate the benefits of investing in real estate from two aspects: its hedging capability against inflation and its ability to improve the performance of a portfolio of financial assets.

The structure of this dissertation is divided into two parts. In the first part, we compare the inflation hedging capacity of real estate and stocks in Thailand. We examine the issue for both direct real estate and indirect real estate. For direct real estate, we use two kinds of housing indices: an index for single houses and one for town houses, while the securitized real estate indices proxy for indirect real estate.

We find that in general direct real estate shows a positive relationship, while indirect real estate shows a negative relationship with unexpected inflation.

Turning to the inflation hedging ability of stocks, we find a negative relationship between stock returns and inflation. Besides, we also extend our study to the inflation hedging capability of stocks in Vietnam, a country with the opposite inflation and institutional background, as a comparative case. Controlling for economic shocks, market crises and political crisis, we find that stocks can hedge against unexpected inflation if demand shocks are the main determinants of inflation. Moreover, the inflation hedging ability of direct real estate and indirect real estate is time-varying and depends on economic conditions.

In the second part, we examine whether the performance of a traditional portfolio comprising of stocks can be improved by adding in various types of real estate. We consistently find that real estate can improve the performance of the traditional portfolio, especially since the year of 2000. We also use real returns of assets, along with their nominal returns in estimations, as a robustness check of our findings.

Our work not only contributes to the existing academic literature, but also has interesting implications for investors and the Thai government.