References (22)


Citations (1)



Inflation Risk and Inflation-Protected and Nominal Bonds

Philipp K. Illeditsch

University of Pennsylvania - Finance Department

April 2016

I decompose inflation risk into (i) a component that is correlated with factors that determine investor’s preferences and investment opportunities and real returns on real assets (inflation-protected bonds, stocks, corporate bonds, real estate, commodities, derivatives), and (ii) a residual component. In equilibrium, only the first component earns a risk premium. Therefore investors should avoid exposure to the residual component. All nominal bonds, including the money-market account, are equally exposed to the residual component. Hence, every investor should put 100% of her wealth in real assets and finance every long/short position in nominal bonds with an equal amount of other nominal bonds or by borrowing/lending cash, that is, investors should hold a zero- investment portfolio of nominal bonds and cash.

Number of Pages in PDF File: 59

Keywords: Inflation Risk, Nominal Bonds, Cash, Money Market Account, Inflation-Protected Bonds, Inflation-Indexed Bonds, TIPS, Dynamic Asset Allocation, Portfolio Choice.

JEL Classification: G11

Open PDF in Browser Download This Paper

Date posted: August 25, 2007 ; Last revised: April 15, 2016

Suggested Citation

Illeditsch, Philipp K., Inflation Risk and Inflation-Protected and Nominal Bonds (April 2016). Available at SSRN: http://ssrn.com/abstract=1009740 or http://dx.doi.org/10.2139/ssrn.1009740

Contact Information

Philipp K. Illeditsch (Contact Author)
University of Pennsylvania - Finance Department ( email )
The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-898-3477 (Phone)

Feedback to SSRN

Paper statistics
Abstract Views: 2,793
Downloads: 652
Download Rank: 27,720
References:  22
Citations:  1

© 2016 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollobot1 in 0.203 seconds