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Inflation Hedging with International Equities

Existing research discards domestic equities as an inflation hedge, yet overlooks international equities. This article shows that international equities hedge against inflation levels and inflation changes more effectively than do domestic equities. The protection is stronger for country-specific inflation shocks and for weak domestic currencies. International equities thus protect investors who need it the most, but remain an insufficient hedge for investors in the most monetarily stable countries. The analysis is based on 24 advanced economies between 1971 and 2010. It tests broad domestic and international equity indices, as well as country portfolios based on inflation co-movement. Data on 21 emerging economies confirms these findings.