Hedging Inflation Risk in a Developing Economy
Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles
AXA Investment Managers
March 29, 2011
Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model inter-temporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro.
Number of Pages in PDF File: 28
Keywords: inflation hedge, pension finance, shortfall risk, portfolio optimisation
JEL Classification: E31, G11, G12, G23working papers series
Date posted: April 12, 2011
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