On the Limits of Hedging Inflation Risk in Investment Portfolios

Damiaan Chen, Roel Beetsma and Sweder van Wijnbergen

No 20720, CEPR Discussion Papers from Centre for Economic Policy Research

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.

JEL-codes: C61 E21 G11 G23 (search for similar items in EconPapers)
Date: 2025-10
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