Inflation-hedging Portfolios in Different Regimes
Brière, Marie; Signori, Ombretta (2009), Inflation-hedging Portfolios in Different Regimes, in Bank für Internationalen Zahlungsausgleich, Portfolio and risk management for central banks and sovereign wealth funds, Bank for International Settlements : Basel, p. 139-163
TypeCommunication / Conférence
Conference titlePortfolio and risk management for central banks and sovereign wealth funds
Book titlePortfolio and risk management for central banks and sovereign wealth funds
Book authorBank für Internationalen Zahlungsausgleich
Number of pages314
MetadataShow full item record
Abstract (EN)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.
Subjects / Keywordsportfolio optimisation; Inflation hedge; shortfall risk; pension finance
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