Inflation Hedging for Long-Term Investors
International Monetary Fund, Finance Dept., Apr 1, 2009 - Business & Economics - 37 pages
Long-term investors face a common problem-how to maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives. While inflation-linked bonds and derivatives have been developed to hedge the effects of inflation, their limited supply and liquidity lead many investors to continue to rely on the indirect hedging properties of traditional asset classes. In this paper, we assess these properties over different time horizons, in the context of a diversified portfolio. Using a vector error correction model, we find that effective short-run hedges, such as commodities, may not work over longer horizons and that tactical asset allocation could enhance investment returns following inflation surprises.
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Inﬂation Hedging Over a OneYear Horizon
Breakpoint Tests and SubSample Regressions
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60-40 equity-bond portfolio altemative asset class retums Barclays Capital benchmark breakpoints Cash U.S. 3-month change in inﬂation coefﬁcient Cointegration Commodity Futures commodity prices Consumer price index correlation currencies deﬁned deﬂation Economics effective hedge effects of inﬂation elasticity Equities U.S. large equity retums estimates expected inﬂation ﬁnd ﬁrst Fisher hypothesis FTSE NAREIT index Gold spot Goldman Sachs hedge against inﬂation hedging properties higher inﬂation horizon indices inﬂation hedge inﬂation rate inﬂation risk inﬂation sensitivity inﬂation shock inﬂation-hedging properties Intemational investment Joumal Journal of Finance long-run long-term investors Merrill Lynch monetary policy NAREIT nominal p-value percentage points proﬁts Real Estate real interest rates real retums reﬂect relationship Retums and Inﬂation risk premium sample periods SDR 3-month interest SDR-weighted equities SDR-weighted government short-term signiﬁcant speciﬁc Stock Retums Tests total retum index Treasuries all maturities U.S. 3-month T-bills U.S. dollar U.S. inﬂation U.S. large cap Vector Autoregressive