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Allocating Commodities in Inflation Hedging Portfolios: A Core Driven Global Macro Strategy

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  • Fulli-Lemaire, Nicolas

Abstract

Recent academic studies have shown that since the mid-nineties, the passthrough of exogenous oil shocks into headline inflation has been increasing while the passthrough into core inflation seems to have ceased. This paper explores the implications in term of commodity allocation for inflation hedging portfolios these recent works have paved the way for. We proceed by first evidencing a linkage between the headline to core inflation spread and tradable commodities. We subsequently envisage exploiting it threefold: Firstly by devising an efficient strategic allocation using core inflation forecasts to determine the commodities natural weight in the portfolio as dictated by our macro approach. Secondly by testing a tactical allocation strategy which would time the passthrough cycle to determine dynamically the optimal share of commodities in the allocation. And eventually by proposing a strategy to arbitrage core inflation linked derivatives by cross-replicating them with commodity portfolios.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 42852.

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Date of creation: 26 Mar 2012
Date of revision: 15 Oct 2012
Handle: RePEc:pra:mprapa:42852

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Related research

Keywords: Inflation Hedging; Portfolio Allocation; Commodities; Core Inflation; Global Macro; Inflation Passthrough; Arbitrage Pricing; Strategic Allocation; Tactical Allocation;

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References

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  1. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, vol. 31(1), pages 126-133, January.
  2. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
  3. Fuertes, Ana-Maria & Miffre, Joëlle & Rallis, Georgios, 2010. "Tactical allocation in commodity futures markets: Combining momentum and term structure signals," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2530-2548, October.
  4. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
  5. José De Gregorio & Oscar Landerretche & Christopher Neilson, 2007. "Another Pass-Through Bites The Dust? Oil Prices And Inflation," Working Papers wp238, University of Chile, Department of Economics.
  6. Sue Wing, Ian, 2008. "Explaining the declining energy intensity of the U.S. economy," Resource and Energy Economics, Elsevier, vol. 30(1), pages 21-49, January.
  7. Fulli-Lemaire, Nicolas & Palidda, Ernesto, 2012. "Swapping Headline for Core Inflation: An Asset Liability Management Approach," MPRA Paper 42853, University Library of Munich, Germany, revised 16 Nov 2012.
  8. Olivier J. Blanchard & Marianna Riggi, 2013. "WHY ARE THE 2000s SO DIFFERENT FROM THE 1970s? A STRUCTURAL INTERPRETATION OF CHANGES IN THE MACROECONOMIC EFFECTS OF OIL PRICES," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1032-1052, October.
  9. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
  10. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
  11. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September.
  12. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
  13. Marie Brière & Ombretta Signori, 2011. "Inflation hedging portfolios in different regimes," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163 Bank for International Settlements.
  14. Todd E. Clark & Stephen J. Terry, 2009. "Time variation in the inflation passthrough of energy prices," Research Working Paper RWP 09-06, Federal Reserve Bank of Kansas City.
  15. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-48, April.
  16. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 09/90, International Monetary Fund.
  17. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.
  18. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
  19. James D. Hamilton, 2011. "Historical Oil Shocks," NBER Working Papers 16790, National Bureau of Economic Research, Inc.
  20. Paul van den Noord & Christophe André, 2007. "Why has Core Inflation Remained so Muted in the Face of the Oil Shock?," OECD Economics Department Working Papers 551, OECD Publishing.
  21. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
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Citations

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Cited by:
  1. Fulli-Lemaire, Nicolas, 2012. "Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics," MPRA Paper 42854, University Library of Munich, Germany.
  2. Fulli-Lemaire, Nicolas & Palidda, Ernesto, 2012. "Swapping Headline for Core Inflation: An Asset Liability Management Approach," MPRA Paper 42853, University Library of Munich, Germany, revised 16 Nov 2012.
  3. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.

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