An Inflation Hedging Strategy with Commodities: A Core Driven Global Macro

The Journal of Investment Strategies, Risk - Summer Issue, June 2013

51st Euro Working Group on Commodities and Financial Modelling Meeting Paper - London 2013

20th Forecasting Financial Markets Conference Paper - Hannover 2013

Asian Finance Association (AsFA) 2013 Conference Paper - Nanchang 2013

27 Pages Posted: 27 Mar 2012 Last revised: 4 Jul 2013

Date Written: January 24, 2013

Abstract

Recent academic studies have shown that since the mid-nineties, the pass-through of exogenous oil shocks into headline inflation has been increasing while the pass through into core inflation seems to have ceased. This paper explores the implications in terms of commodity allocation for inflation hedging portfolios these recent works have paved the way for. We proceed by first evidencing a link between the headline to core inflation spread and tradable commodities. We subsequently intend to exploit this link in two ways: firstly by devising an efficient strategic allocation using core inflation forecasts to determine the commodities’ natural weight in the portfolio as dictated by our macro approach. And secondly by testing a tactical allocation strategy which would time the pass-through cycle to dynamically determine the optimal share of commodities in the allocation.

Keywords: Inflation Hedging, Portfolio Allocation, Commodities, Core Inflation, Global Macro, Inflation Passthrough, Arbitrage Pricing, Strategic Allocation, Tactical Allocation

JEL Classification: C58, C63, E3, G11, Q02

Suggested Citation

Fulli-Lemaire, Nicolas, An Inflation Hedging Strategy with Commodities: A Core Driven Global Macro (January 24, 2013). The Journal of Investment Strategies, Risk - Summer Issue, June 2013 ; 51st Euro Working Group on Commodities and Financial Modelling Meeting Paper - London 2013; 20th Forecasting Financial Markets Conference Paper - Hannover 2013; Asian Finance Association (AsFA) 2013 Conference Paper - Nanchang 2013. Available at SSRN: https://ssrn.com/abstract=2028988 or http://dx.doi.org/10.2139/ssrn.2028988

Nicolas Fulli-Lemaire (Contact Author)

Oliver Wyman SA ( email )

1 rue Euler
Paris, 75008
France

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