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

Marie Brière () and Ombretta Signori

Research in International Business and Finance, 2013, vol. 27, issue 1, 209-222

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.

Keywords: Inflation hedge; Pension finance; Shortfall risk; Portfolio optimisation (search for similar items in EconPapers)
JEL-codes: E31 G11 G12 G23 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:27:y:2013:i:1:p:209-222

DOI: 10.1016/j.ribaf.2012.04.003

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