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Inflation Hedging for Long-Term Investors

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Author Info
Shaun K. Roache
Alexander P. Attie
Abstract

Long-term investors face a common problem-how to maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives. While inflation-linked bonds and derivatives have been developed to hedge the effects of inflation, their limited supply and liquidity lead many investors to continue to rely on the indirect hedging properties of traditional asset classes. In this paper, we assess these properties over different time horizons, in the context of a diversified portfolio. Using a vector error correction model, we find that effective short-run hedges, such as commodities, may not work over longer horizons and that tactical asset allocation could enhance investment returns following inflation surprises.

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Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/90.

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Length: 37 pages
Date of creation: 23 Apr 2009
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Handle: RePEc:imf:imfwpa:09/90

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Keywords: Inflation ; Capital markets ; Private investment ; Financial instruments ; Hedge funds ; Commodities ; Asset prices ; Economic models ;

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