On the systemic nature of global inflation, its association with equity markets and financial portfolio implications

TL;DR

This study employs advanced mathematical techniques to analyze the systemic nature of global inflation, its influence on equity markets, and implications for financial portfolio optimization over the past 70 years.

Contribution

It introduces new eigenvalue and inner-product based methods to quantify global inflation's systemic properties and assesses their impact on equity markets and portfolio strategies.

Findings

Global inflation exhibits systemic characteristics with certain countries being more central.

Inflation significantly affects the robustness of equity indices and sector performance.

Time-varying portfolio optimization identifies asset classes that improve Sharpe ratios during inflationary periods.

Abstract

This paper uses new and recently introduced mathematical techniques to undertake a data-driven study on the systemic nature of global inflation. We start by investigating country CPI inflation over the past 70 years. There, we highlight the systemic nature of global inflation with a judicious application of eigenvalue analysis and determine which countries exhibit most "centrality" with an inner-product based optimization method. We then turn to inflationary impacts on financial market securities, where we explore country equity indices' equity robustness and the varied performance of equity sectors during periods of significant inflationary pressure. Finally, we implement a time-varying portfolio optimization to determine which asset classes were most beneficial in increasing portfolio Sharpe ratio when an investor must hold a core (and constant) allocation to equities.