Chapter 3: Energy Futures as an Inflation Hedge in a Time-Varying Coefficient Framework

This study investigates whether energy futures provide the ability to hedge against inflation. Using a Markov-switching vector error correction model (MS-VECM), we find that the Brent crude oil futures index is the only index that exhibits significant inflation hedging capability, among the subindexes of energy futures. Moreover, its inflation hedging capacity exhibits substantial variation over time, with most of the hedging power emerging under the relatively longer and more common regime. Results are robust to include common stocks and bonds in the model. We do not find evidence that unleaded gas, heating oil, gas oil, and natural gas futures have inflation hedging ability. Overall, our results suggest that crude oil futures are alternative candidates for well-diversified investment portfolios with inflation protection ability.