“The Inflation Hedging Ability of Real Estate Price Index in Hong Kong”

Hanwen Duan, Wuhan University

Zhenxuan Wang, Wuhan University

Zhiping Zhou, Wuhan University 

This paper investigates whether real estate index is able to hedge against inflation in Hong Kong. We apply a Markov switching vector error-correction model approach on a sample period ranging from August 1991 to December 2015. We analyze monthly time series of four kinds of real estate price index and the stock index in Hong Kong. The results reveal that all of the real estate price index provide the ability to hedge against inflation in the long run. Among them, Hong Kong Island Residential Price Index offers a better performance with a faster adjustment speed. The hedging capacity usually exhibits under relatively longer and more common regimes covering the period of steady increase of the economy. We also compare the prediction performance of the Markov switching models with that of linear models and find that the Markov switching models provide better results.