Inflation Forecasts and European Asset Returns: A Regime-Switching Approach

Considering market-based inflation expectations, we show that investors’ forecasts are non-linear. We capture this non-linear behavior with a Markov-switching model allows us to identify regime of high uncertainty, and low uncertainty concern about inflation. Using complete cross-asset panel equity sectors, bonds, commodities, perform regressions in both regimes including several control variables, the exposure European assets returns implied is regime-dependent. inflation-indexed government bonds oil best way get slow upward revisions future correspond periods rallying thus alternatives hedge oneself against when considered as variable interest by market participants, which, fact, corresponds breaks trend realized In particular, provide empirical evidence some sectors exhibit good inflation-hedging properties.