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Hedging inflation risk in a developing economy: The case of Brazil

  • Brière, Marie
  • Signori, Ombretta

Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model inter-temporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro.

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Article provided by Elsevier in its journal Research in International Business and Finance.

Volume (Year): 27 (2013)
Issue (Month): 1 ()
Pages: 209-222

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Handle: RePEc:eee:riibaf:v:27:y:2013:i:1:p:209-222
Contact details of provider: Web page: http://www.elsevier.com/locate/ribaf

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