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On the Limits of Hedging Inflation Risk in Investment Portfolios

Author

Listed:
  • Damiaan Chen

    (De Nederlandsche Bank)

  • Roel Beetsma

    (University of Amsterdam)

  • Sweder van Wijnbergen

    (University of Amsterdam)

Abstract

We explore to what extent real returns on investment portfolios can be hedged against inflation risk by using existing financial market instruments. We find that inflation-linked bonds offer only limited protection against inflation risk and that nominal debt and stocks play at least comparable roles in this respect. These findings apply to both a static and a dynamic setting. The demonstrated limits of hedging inflation risk are of particular relevance for long-term investors, such as pension funds with participants concerned about the real value of their pension benefits.

Suggested Citation

  • Damiaan Chen & Roel Beetsma & Sweder van Wijnbergen, 2025. "On the Limits of Hedging Inflation Risk in Investment Portfolios," Tinbergen Institute Discussion Papers 25-059/IV, Tinbergen Institute.
    • Handle: RePEc:tin:wpaper:20250059
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    References listed on IDEAS

    as
    1. Robert A. Jarrow & Yildiray Yildirim, 2023. "Inflation-Adjusted Bonds, Swaps, and Derivatives," Annual Review of Financial Economics, Annual Reviews, vol. 15(1), pages 449-471, November.
    2. Marie Brière & Ombretta Signori, 2012. "Inflation-Hedging Portfolios : Economic Regimes Matter," Post-Print hal-01494498, HAL.
    3. Marie Briere & Ombretta Signori, 2012. "Inflation-hedging portfolios: Economic regimes matter," ULB Institutional Repository 2013/253373, ULB -- Universite Libre de Bruxelles.
    4. Geert Bekaert & Xiaozheng Wang, 2010. "Inflation risk and the inflation risk premium [Do macro variables, asset markets or surveys forecast inflation better?]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(64), pages 755-806.
    5. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    6. Spierdijk, Laura & Umar, Zaghum, 2015. "Stocks, bonds, T-bills and inflation hedging: From great moderation to great recession," Journal of Economics and Business, Elsevier, vol. 79(C), pages 1-37.
    7. Campbell, John Y. & Sunderam, Adi & Viceira, Luis M., 2017. "Inflation Bets or Deflation Hedges? The Changing Risks of Nominal Bonds," Critical Finance Review, now publishers, vol. 6(2), pages 263-301, September.
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    10. Chen, D.H.J. & Beetsma, R.M.W.J. & van Wijnbergen, S.J.G., 2020. "Unhedgeable inflation risk within pension schemes," Insurance: Mathematics and Economics, Elsevier, vol. 90(C), pages 7-24.
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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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