Inflation Expectation and Asset Allocation in the Presence of an Indexed Bond

34 Pages Posted: 13 Jun 2006

See all articles by Abdullah Mamun

Abdullah Mamun

University of Saskatchewan - Department of Finance and Management Science

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance

Date Written: June 6, 2006

Abstract

Optimal asset allocation choice for long term individual investors is complicated by inflation expectation. This article analyzes how anticipated rate of inflation influences asset allocation decision of US investors who employ a subjective equilibrium allocation approach in which investors include their inflation forecasts based on a survey of consumers' price expectations and the interest rate model in the optimization process. The universe of asset choices includes a newly introduced Treasury inflation protected securities (TIPS), equity, real estate, Treasury bonds and corporate bonds. This study shows that in an event of higher anticipated rate of inflation investors should allocate more wealth to TIPS and reduce their exposure to Treasury bonds, corporate bonds and equity.

Keywords: Inflation, Treasury Inflation Protected Securities (TIPS), Equilibrium Asset Allocation, Inflation Expectation

JEL Classification: G11, G12

Suggested Citation

Mamun, Abdullah and Visaltanachoti, Nuttawat, Inflation Expectation and Asset Allocation in the Presence of an Indexed Bond (June 6, 2006). Available at SSRN: https://ssrn.com/abstract=907147 or http://dx.doi.org/10.2139/ssrn.907147

Abdullah Mamun (Contact Author)

University of Saskatchewan - Department of Finance and Management Science ( email )

College of Commerce
Saskatoon, Saskatchewan S7N 5A7
Canada
306 966 1862 (Phone)
306 966 2515 (Fax)

HOME PAGE: http://www.commerce.usask.ca/faculty/mamun/

Nuttawat Visaltanachoti

Massey University - Department of Economics and Finance ( email )

School of Economics and Finance
Private Bag 102904, NSMC
Auckland
New Zealand
64 9 414 0800 (43169) (Phone)
64 9 441 8177 (Fax)

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