On the Limits of Hedging Inflation Risk in Investment Portfolios

Damiaan Chen, Roel Beetsma and Sweder van Wijnbergen
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Damiaan Chen: De Nederlandsche Bank
Roel Beetsma: University of Amsterdam
Sweder van Wijnbergen: University of Amsterdam

No 25-059/IV, Tinbergen Institute Discussion Papers from Tinbergen Institute

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.

Keywords: unhedgeable inflation risk; incomplete markets; welfare loss; mean-variance frontiers; minimum risk portfolio; nominal and index-linked bonds (search for similar items in EconPapers)
JEL-codes: C61 E21 G11 G23 (search for similar items in EconPapers)
Date: 2025-10-10
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Persistent link: https://EconPapers.repec.org/RePEc:tin:wpaper:20250059

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