Hedging Inflation Risk in a Developing Economy: The case of Brazil

Marie Brière and Ombretta Signori
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Marie Brière: LEDa - Laboratoire d'Economie de Dauphine - IRD - Institut de Recherche pour le Développement - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
Ombretta Signori: AXA France - AXA

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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)
Date: 2013-01
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Citations: View citations in EconPapers (3)

Published in Research in International Business and Finance, 2013, 27 (1), pp.28. ⟨10.1016/j.ribaf.2012.04.003⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01492983

DOI: 10.1016/j.ribaf.2012.04.003

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