Advanced Search
MyIDEAS: Login to save this paper or follow this series

Do Inflation-Linked Bonds Still Diversify ?

Contents:

Author Info

  • Brière, Marie
  • Signori, Ombretta

Abstract

The diversifying power of inflation-linked (IL) bonds relative to traditional asset classes has changed significantly. In this paper, we study the dynamics of conditional volatilities and correlations for three asset classes, IL bonds, nominal bonds, and equities, in the USA and Europe. Using a DCC-MVGARCH for the period 1997-2007, we highlight the change that took place in 2003. Although IL bonds once had definite diversification power, they are now highly correlated with nominal bonds and have reached similar volatility levels. As a result, the two asset classes are practically substitutable. This seems to be due to more stable inflation expectations and to a more liquid IL bond market. Although diversification was a valuable reason for introducing IL bonds in a global portfolio before 2003, this is no longer the case. Dynamic portfolio optimisation using our estimates of conditional correlations and volatilities clearly demonstrates that the optimal weight of IL bonds in a portfolio decreased sharply in 2003 in favour of nominal bonds and equities.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://basepub.dauphine.fr/xmlui/bitstream/123456789/7741/1/signori.pdf
Download Restriction: no

Bibliographic Info

Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7741.

as in new window
Length:
Date of creation: Mar 2009
Date of revision:
Publication status: Published in European Financial Management, 2009, Vol. 15, no. 2. pp. 279-297.Length: 18 pages
Handle: RePEc:dau:papers:123456789/7741

Contact details of provider:
Web page: http://www.dauphine.fr/en/welcome.html
More information through EDIRC

Related research

Keywords: conditional correlation; conditional volatility; portfolio choice; optimal allocation; Inflation-linked bonds;

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. John Y. Campbell & Robert J. Shiller, 1996. "A Scorecard for Indexed Government Debt," NBER Working Papers 5587, National Bureau of Economic Research, Inc.
  2. Hunter, Delroy M. & Simon, David P., 2005. "Are TIPS the "real" deal?: A conditional assessment of their role in a nominal portfolio," Journal of Banking & Finance, Elsevier, Elsevier, vol. 29(2), pages 347-368, February.
  3. Peter Hördahl & Oreste Tristani, 2012. "Inflation Risk Premia In The Term Structure Of Interest Rates," Journal of the European Economic Association, European Economic Association, European Economic Association, vol. 10(3), pages 634-657, 05.
  4. Dick van Dijk & Haris Munandar & Christian Hafner, 2011. "The euro introduction and noneuro currencies," Applied Financial Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 21(1-2), pages 95-116.
  5. Robert F. Engle & Kevin Sheppard, 2001. "Theoretical and Empirical properties of Dynamic Conditional Correlation Multivariate GARCH," NBER Working Papers 8554, National Bureau of Economic Research, Inc.
  6. Geert Bekaert & Guojun Wu, 1997. "Asymmetric Volatility and Risk in Equity Markets," NBER Working Papers 6022, National Bureau of Economic Research, Inc.
  7. G. William Schwert, 1990. "Business Cycles, Financial Crises, and Stock Volatility," NBER Working Papers 2957, National Bureau of Economic Research, Inc.
  8. J. Benson Durham, 2006. "An estimate of the inflation risk premium using a three-factor affine term structure model," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2006-42, Board of Governors of the Federal Reserve System (U.S.).
  9. Billio, Monica & Caporin, Massimiliano, 2009. "A generalized Dynamic Conditional Correlation model for portfolio risk evaluation," Mathematics and Computers in Simulation (MATCOM), Elsevier, Elsevier, vol. 79(8), pages 2566-2578.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Aglietta, Michel & Brière, Marie & Rigot, Sandra & Signori, Ombretta, 2012. "Rehabilitating the Role of Active Management for Pension Funds," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/10219, Paris Dauphine University.
  2. Signori, Ombretta & Brière, Marie, 2012. "Inflation-Hedging Portfolios : Economic Regimes Matter," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/9296, Paris Dauphine University.
  3. Brière, Marie & Signori, Ombretta, 2011. "Inflation-hedging Portfolios in Different Regimes," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7744, Paris Dauphine University.
  4. John Campbell & Robert Shiller & Luis Viceira, 2009. "Understanding Inflation-Indexed Bond Markets," Yale School of Management Working Papers, Yale School of Management amz2587, Yale School of Management.
  5. Szafarz, Ariane & Brière, Marie, 2011. "Investment in Microfinance Equity : Risk, Return, and Diversification Benefits," Economics Papers from University Paris Dauphine, Paris Dauphine University 123456789/7858, Paris Dauphine University.
  6. Marie Briere & Ombretta Signori, 2013. "Hedging inflation risk in a developing economy: The case of Brazil," ULB Institutional Repository 2013/167772, ULB -- Universite Libre de Bruxelles.
  7. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium," Economic Policy, CEPR;CES;MSH, CEPR;CES;MSH, vol. 25, pages 755-806, October.
  8. Cartea, Álvaro & Saúl, Jonatan & Toro, Juan, 2012. "Optimal portfolio choice in real terms: Measuring the benefits of TIPS," Journal of Empirical Finance, Elsevier, Elsevier, vol. 19(5), pages 721-740.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:dau:papers:123456789/7741. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Alexandre Faure).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.