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Inflation Hedging for Long-Term Investors

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  • Shaun K. Roache
  • Alexander P. Attie
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    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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    Bibliographic Info

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

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    Length: 37
    Date of creation: 01 Apr 2009
    Date of revision:
    Handle: RePEc:imf:imfwpa:09/90

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    Keywords: Private investment; Financial instruments; Hedge funds; Economic models; inflation; monetary policy; effects of inflation; real interest rates; monetary policy regime; monetary fund; change in inflation; inflation rate; treasury bonds; rate of inflation; real interest rate; price level; real money; inflationary expectations; monetary economics; inflation rates; nominal interest rates; price inflation; monetary inflation; real rates; increase in inflation; monetary policy rule; inflation affect; sdr valuation; long-term interest rates; stable prices; high inflation; monetary factors; sdr valuation basket; discount rate; real output; financial stability; rise in inflation; money demand; rising inflation; monetary policies; monetary assets; money balances; monetary conditions; monetary economy; inflationary pressures; monetary regimes; annual inflation; monetary frameworks; measure of inflation; monetary sector;

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    References

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    Cited by:
    1. Marie Briere & Ombretta Signori, 2009. "Inflation-hedging portfolios in Different Regimes," Working Papers CEB, ULB -- Universite Libre de Bruxelles 09-047.RS, ULB -- Universite Libre de Bruxelles.
    2. 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.
    3. Fulli-Lemaire, Nicolas, 2012. "A Dynamic Inflation Hedging Trading Strategy Using a CPPI," MPRA Paper 42851, University Library of Munich, Germany, revised 13 Nov 2012.
    4. 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.
    5. 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.
    6. Fulli-Lemaire, Nicolas, 2012. "Allocating Commodities in Inflation Hedging Portfolios: A Core Driven Global Macro Strategy," MPRA Paper 42852, University Library of Munich, Germany, revised 15 Oct 2012.
    7. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.
    8. Bruno, Salvatore & Chincarini, Ludwig, 2010. "A historical examination of optimal real return portfolios for non-US investors," Review of Financial Economics, Elsevier, Elsevier, vol. 19(4), pages 161-178, October.
    9. Dirk Broeders & Paul Hilbers & David Rijsbergen, 2013. "What drives pension indexation in turbulent times? An empirical examination of Dutch pension funds," DNB Working Papers, Netherlands Central Bank, Research Department 368, Netherlands Central Bank, Research Department.

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