Inflation Hedging for Long-Term Investors

Author/Editor:

Shaun K. Roache ; Alexander P. Attie

Publication Date:

April 1, 2009

Electronic Access:

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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.

Series:

Working Paper No. 2009/090

Subject:

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

English

Publication Date:

April 1, 2009

ISBN/ISSN:

9781451872378/1018-5941

Stock No:

WPIEA2009090

Pages:

37

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