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Inflation-hedging Portfolios in Different Regimes

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  • Brière, Marie
  • Signori, Ombretta
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    Abstract

    The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real return should have a larger weighting in risky assets, especially commodities.

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    Bibliographic Info

    Paper provided by Paris Dauphine University in its series Economics Papers from University Paris Dauphine with number 123456789/7744.

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    Date of creation: Oct 2011
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    Publication status: Published in Portfolio and risk management for central banks and sovereign wealth funds,
    Handle: RePEc:dau:papers:123456789/7744

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    Web page: http://www.dauphine.fr/en/welcome.html
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    Related research

    Keywords: portfolio optimisation; Inflation hedge; shortfall risk; pension finance;

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