Time-Varying Green Yield Differential

Abstract

This thesis investigates the inflation hedging properties of the main commodity classes: metal, energy, livestock, and agriculture, comparing them to other asset classes against both expected and unexpected inflation from 1970 to 2023. We conduct a three-step analysis. first, we examine the relationships with historical inflation. Furthermore, we test the hedging capabilities of each asset against expected and unexpected inflation. Finally, we assess nominal and real returns for each asset class. We also regress the excess returns on the Capital asset pricing model (CAPM) and calculate Sharpe ratios to evaluate risk-adjusted performance. We conclude that only US housing consistently hedges against expected inflation. Returns in commodities and gold exhibit substantial sensitivity to inflation, and the Center for International Securities and Derivatives Markets (CISDM) Index emerges as superior in returns. In addition, the CISDM index shows a strong correlation with unexpected inflation over a monthly and quarterly holding period. However, no asset hedge against both expected and unexpected inflation across all periods.