Inflation Hedging for Long-Term Investors

April 1, 2009

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Format: Chicago

Shaun K. Roache, and Alexander P. Attie Inflation Hedging for Long-Term Investors, (USA: International Monetary Fund, 2009) accessed December 26, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Long-term investors face a common problem-how to maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives. While inflation-linked bonds and derivatives have been developed to hedge the effects of inflation, their limited supply and liquidity lead many investors to continue to rely on the indirect hedging properties of traditional asset classes. In this paper, we assess these properties over different time horizons, in the context of a diversified portfolio. Using a vector error correction model, we find that effective short-run hedges, such as commodities, may not work over longer horizons and that tactical asset allocation could enhance investment returns following inflation surprises.

Subject: Bonds, Currencies, Financial institutions, Financial regulation and supervision, Hedging, Inflation, Money, Prices, Stocks

Keywords: Bonds, Break, Currencies, Diversification, Global, Hedging, Impulse response, Inflation, Inflation sensitivity, Inflation shock, Inflation-hedging property, Investments, Less-than-full inflation compensation, Portfolio Allocation, Spot price, Stocks, Total return, WP, Yield

Publication Details

Pages:

37
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/090
Stock No:

WPIEA2009090
ISBN:

9781451872378
ISSN:

1018-5941

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