Common stocks, gold, and Bitcoin as inflation hedges: A time-varying relationship

Abstract

In this thesis I study the inflation-hedging abilities of common stocks, gold, and Bitcoin, and how their prices react to changes in inflation expectations. I allow for time variation in the relationship between the asset prices and inflationary trends and attempt to explain the time variation by dynamic economic states: rising, stable, and slowing economy. Using standard linear OLS regressions under a Fisherian definition of an inflation hedge and monthly data from 1982–2022, I conclude that none of the three assets meet the criteria of an inflation-hedging asset. I contribute to existing literature mainly by confirming that the way the U.S. stock market reacts to changes in expected inflation changes significantly during the 2007–2008 financial crisis. The division into economic states does not provide a viable explanation for the time variation in the stock returns–inflation relationships, but it appears to have some explanatory power over the relationship between inflation expectations and the returns of gold and Bitcoin.