Inflation-Hedging Portfolios: Economic Regimes Matter
AXA Investment Managers
Amundi Asset Management; Paris Dauphine University; Université Libre de Bruxelles
September 12, 2011
Journal of Portfolio Management, 38(4), 2012, p. 43-58.
The exceptional rise in government deficits following the subprime crisis, the recent commodity price spikes and the increase in inflation volatility have revived the debate on medium to long-term resurgence of inflation. Using a vector-autoregressive model, this paper investigates the relationships between asset returns and inflation and the optimal strategic asset allocation for investors seeking to hedge inflation risk in two different types of macroeconomic regimes. In a volatile macroeconomic environment marked by countercyclical supply shocks, cash, inflation-linked bonds and precious metals play an essential role, while in a more stable environment (“Great Moderation”) with procyclical demand shocks, cash and nominal bonds play the most significant role, followed by precious metals, real estate and equities. An ambitious investor in terms of required real returns should have a larger weighting in equities, real estate and precious metals.
Keywords: inflation hedge, pension finance, shortfall risk, portfolio optimisation
JEL Classification: E31, G11, G12, G23
Date posted: October 19, 2011 ; Last revised: September 2, 2014