Stocks for Inflation Shocks by Megan Czasonis, Ding Li, Grace (Tiantian) Qiu, Huili Song, David Turkington :: SSRN

Research suggests that the relationship between inflation and equities is nuanced which poses a challenge for investors seeking to hedge inflation. We propose a statistical method for predicting the relative vulnerability or resilience of individual stocks to positive inflation shocks, which we summarize as individual inflation robustness scores. It compares a stock's circumstances-as described by a collection of firm attributes-to the circumstances of stocks that performed relatively well, or poorly, in past inflation events. The key advantage of this approach is that it captures nonlinear, conditional relationships between firm characteristics and inflation by allowing the influence of each attribute to vary across stocks and time. In a series of out-of-sample tests, we find that these robustness scores reliably predict the crosssection of stock returns during 65 inflation shocks since 2008 and that an inflation robustness factor constructed from these scores significantly outperforms during inflation events. These results suggest that investors may use this method to hedge inflation with a basket of inflation robust stocks.