Using classical regression and cointegration approach, this study investigates the short-term and long-term inflation hedging effectiveness of residential property in Hong Kong over the period 1980-2011.The cointegration test used is the Autoregressive distributed lagged bounds testing approach of Pesaran et al. (2001) -[Pesaran, M.H., Y. Shin and R. J. Smith, "Bounds testing approaches to the analysis of level relationships", Journal of Applied Econometrics, vol. 16, pp. 289-326, May, 2001 ]

more »

... at based on the estimation of an unrestricted error correction model. This paper addresses one of the major problems of how to use a relatively small sample to estimate the long term relationships between variables that faced by many researchers in economic modeling. The results of actual inflation model show that the Hong Kong small and medium size residential property provides an effective short-term hedge against actual inflation. The ARDL bounds testing results provide strong evidence to support the hypothesis that residential properties (all categories) and common stock provide effective long-term hedge against inflation. This study concludes that small and medium size residential property in Hong Kong are better short term and long term inflation hedge than large and luxury residential property, common stock and time deposit.