Hedging Inflation Risk in a Developing Economy

28 Pages Posted: 12 Apr 2011

See all articles by Marie Briere

Marie Briere

Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles

Ombretta Signori

AXA Investment Managers

Date Written: March 29, 2011

Abstract

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.

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

JEL Classification: E31, G11, G12, G23

Suggested Citation

Briere, Marie and Signori, Ombretta, Hedging Inflation Risk in a Developing Economy (March 29, 2011). Available at SSRN: https://ssrn.com/abstract=1805512 or http://dx.doi.org/10.2139/ssrn.1805512

Marie Briere

Amundi Asset Management ( email )

90 Boulevard Pasteur
Paris, 75015
France

Paris Dauphine University ( email )

Université Libre de Bruxelles ( email )

Brussels
Belgium

Ombretta Signori (Contact Author)

AXA Investment Managers ( email )

Coeur Défense Tour B - La Défense 4
100 Esplanade du Général de Gaulle
PARIS, Paris La Défense Cedex 92932

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