Emerging Markets Inflation-Linked Bonds
Laurentius (Laurens) Adrianus Petrus Swinkels
Erasmus University Rotterdam (EUR); Norges Bank Investment Management (NBIM)
February 12, 2012
Financial Analysts Journal, Vol 68, Issue 5, pp. 38-56.
We investigate the added value of inflation-linked bonds in an investment portfolio. Recently, several studies questioned the added value of inflation-linked bonds based on empirical analyses on developed markets. We extend the cross-section of countries with a set of nine emerging markets and conclude that for many of these countries the inclusion of inflation-linked bonds improves the risk-return characteristics of investment portfolios. We also document that inflation-linked bond returns correlate more with realized inflation than nominal bonds, even on the short run. Hence, investors that invest in nominal bonds and equities should also allocate a significant amount to inflation-linked bonds. Furthermore, our mean-variance spanning tests indicate that US investors that already invest in emerging markets nominal bonds and emerging markets equities benefit from adding emerging markets inflation-linked bonds to their investment portfolio.
Number of Pages in PDF File: 31
Keywords: allocation, bonds, emerging debt, emerging markets, fixed income, inflation, inflation-linked bonds
JEL Classification: F21, G11, G15
Date posted: June 28, 2011 ; Last revised: October 7, 2012
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