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Inflation hedging portfolios in different regimes

In: Portfolio and risk management for central banks and sovereign wealth funds

  • Marie Brière

    (Université Libre de Bruxelles)

  • Ombretta Signori

    (Amundi (Asset Management of Credit Agricole SA and Société Générale))

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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This chapter was published in:
  • Bank for International Settlements, 2011. "Portfolio and risk management for central banks and sovereign wealth funds," BIS Papers, Bank for International Settlements, number 58, December.
  • This item is provided by Bank for International Settlements in its series BIS Papers chapters with number 58-08.
    Handle: RePEc:bis:bisbpc:58-08
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