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Inflation, Index-Linked Bonds, and Asset Allocation

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  • Zvi Bodie

Abstract

The recent introduction of CPI-linked bonds by several financial institutions is a milestone in the history of the U.S. financial system. It has potentially far-reaching effects on individual and institutional asset allocation decisions because these securities represent the only true long-run hedge against inflation risk. CPI-linked bonds make possible the creation of additional financial innovations that would use them as the asset base. One such innovation that seems likely is inflation-protected retirement annuities. The introduction of index-linked bonds eliminates one of the main obstacles to the indexation of benefits in private pension plans. A firm could hedge the risk associated with a long-term indexed liability by investing in index-linked bonds with the same duration as the indexed liabilities.

Suggested Citation

  • Zvi Bodie, 1988. "Inflation, Index-Linked Bonds, and Asset Allocation," NBER Working Papers 2793, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:2793
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    Cited by:

    1. Robert F. Engle & Che-Hsiung Hong & Alex Kane, 1990. "Valuation of Variance Forecast with Simulated Option Markets," NBER Working Papers 3350, National Bureau of Economic Research, Inc.
    2. Zvi Bodie, 1989. "Inflation Insurance," NBER Working Papers 3009, National Bureau of Economic Research, Inc.
    3. Bodie, Zvi, 1990. "Pensions as Retirement Income Insurance," Journal of Economic Literature, American Economic Association, vol. 28(1), pages 28-49, March.
    4. Scott E. Hein & Jeffrey M. Mercer, 2003. "Are TIPS really tax disadvantaged? Rethinking the tax treatment of U.S. Treasury Inflation Indexed Securities," FRB Atlanta Working Paper 2003-9, Federal Reserve Bank of Atlanta.
    5. Thomas Mayer, 1998. "Indexed Bonds And Heterogeneous Agents," Contemporary Economic Policy, Western Economic Association International, vol. 16(1), pages 77-84, January.
    6. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.
    7. Fulli-Lemaire, Nicolas, 2012. "Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics," MPRA Paper 42854, University Library of Munich, Germany.
    8. Monika Chopra & Chhavi Mehta & Aman Srivastava, 2021. "Inflation-Linked Bonds as a Separate Asset Class: Evidence from Emerging and Developed Markets," Global Business Review, International Management Institute, vol. 22(1), pages 219-235, February.
    9. Olivia S Mitchell & John Piggott & Michael Sherris & Shaun Yow, 2006. "Financial Innovation for an Ageing World," RBA Annual Conference Volume (Discontinued), in: Christopher Kent & Anna Park & Daniel Rees (ed.),Demography and Financial Markets, Reserve Bank of Australia.

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