Inflation-Hedging Portfolios: Economic Regimes Matter

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: The exceptional rise in government deficits following the subprime crisis, the recent commodity price spikes and the increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. Using a vector-autoregressive model, this paper investigates the relationships between asset returns and inflation and the optimal strategic asset allocation for investors seeking to hedge inflation risk in two different types of macroeconomic regimes. In a volatile macroeconomic environment marked by countercyclical supply shocks, cash, inflation-linked bonds and precious metals play an essential role, while in a more stable environment ("Great Moderation") with procyclical demand shocks, cash and nominal bonds play the most significant role, followed by precious metals, real estate and equities. An ambitious investor in terms of required real returns should have a larger weighting in equities, real estate and precious metals.

Keywords: Inflation hedge; pension finance; shortfall risk; portfolio optimisation (search for similar items in EconPapers)
Date: 2012
Note: View the original document on HAL open archive server: https://hal.science/hal-01494498v1
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Citations: View citations in EconPapers (8)

Published in Journal of Portfolio Management, 2012, 38 (4), ⟨10.3905/jpm.2012.38.4.043⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01494498

DOI: 10.3905/jpm.2012.38.4.043

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