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

Marie Brière () and Ombretta Signori

ULB Institutional Repository from ULB -- Universite Libre de Bruxelles

Abstract: 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. © 2012 Elsevier B.V.

Keywords: Inflation hedge; Pension finance; Portfolio optimisation; Shortfall risk (search for similar items in EconPapers)
Date: 2013-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-rmg
Note: SCOPUS: ar.j
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Citations: View citations in EconPapers (4)

Published in: Research in international business and finance (2013) v.27 n° 1,p.209-222

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Journal Article: Hedging inflation risk in a developing economy: The case of Brazil (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:ulb:ulbeco:2013/167772

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