Inflation Tracking Portfolios

23 Pages Posted: 8 Jun 2012 Last revised: 21 Jul 2024

See all articles by Chris Downing

Chris Downing

BlackRock

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

Mike Rierson

affiliation not provided to SSRN

Date Written: June 2012

Abstract

We propose a new approach to constructing inflation tracking portfolios. The key to this approach is the insight that asset returns track expected inflation far better than they track current realized inflation. Thus, we can construct portfolios that track next month's inflation much more closely than they track this month's inflation. We show this staggered hedging approach can eliminate nearly 90 percent of the tracking error of more conventional inflation hedging strategies. We also find that long-short positions in equities play a dominant role in the effective hedging of inflation risk over extended horizons. These results suggest that the goal of protecting portfolios against inflation may be more feasible that is commonly believed.

Suggested Citation

Downing, Christopher T. and Longstaff, Francis A. and Rierson, Mike, Inflation Tracking Portfolios (June 2012). NBER Working Paper No. w18135, Available at SSRN: https://ssrn.com/abstract=2079879

Christopher T. Downing (Contact Author)

BlackRock ( email )

3 Garden Road
Hong Kong
Hong Kong

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area ( email )

Los Angeles, CA 90095-1481
United States
310-825-2218 (Phone)
310-206-5455 (Fax)

Mike Rierson

affiliation not provided to SSRN

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