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Emerging Markets Inflation-Linked Bonds

31 Pages Posted: 28 Jun 2011 Last revised: 18 Jul 2016

Laurens Swinkels

Erasmus University Rotterdam (EUR); Robeco Institutional Asset Management

Date Written: February 12, 2012

Abstract

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.

Keywords: allocation, bonds, emerging debt, emerging markets, fixed income, inflation, inflation-linked bonds

JEL Classification: F21, G11, G15

Suggested Citation

Swinkels, Laurens, Emerging Markets Inflation-Linked Bonds (February 12, 2012). Financial Analysts Journal, Vol 68, Issue 5, pp. 38-56.. Available at SSRN: https://ssrn.com/abstract=1873967 or http://dx.doi.org/10.2139/ssrn.1873967

Laurens Swinkels (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Robeco Institutional Asset Management ( email )

Rotterdam, 3000
Netherlands
+31 10 224 2470 (Phone)
+31 10 224 2110 (Fax)

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