Inflation-Hedging Portfolios in Different Regimes

40 Pages Posted: 12 Feb 2011

See all articles by Ombretta Signori

Ombretta Signori

AXA Investment Managers

Marie Brière

affiliation not provided to SSRN

Date Written: April 9, 2010

Abstract

The unconventional monetary policies implemented in the wake of the subprime crisis and the recent increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. This paper presents the optimal strategic asset allocation for investors seeking to hedge inflation risk. Using a vector-autoregressive model, we investigate the optimal choice for an investor with a fixed target real return at different horizons, with a shortfall probability constraint. We show that the strategic allocation differs sharply across regimes. In a volatile macroeconomic environment, inflation-linked bonds, equities, commodities and real estate play an essential role. In a stable environment (“Great Moderation”), nominal bonds play the most significant role, with equities and commodities. An ambitious investor in terms of required real returns should have a larger weighting in risky assets, especially commodities.

Keywords: inflation hedge, pension finance, shortfall risk, portfolio optimisation

JEL Classification: E31, G11, G12, G23

Suggested Citation

Signori, Ombretta and Brière, Marie, Inflation-Hedging Portfolios in Different Regimes (April 9, 2010). Available at SSRN: https://ssrn.com/abstract=1758674 or http://dx.doi.org/10.2139/ssrn.1758674

Ombretta Signori (Contact Author)

AXA Investment Managers ( email )

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Marie Brière

affiliation not provided to SSRN

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