Inflation Hedging for Long-Term Investors
IMF Working Papers, April 1, 2009
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Bibliographic details
- Authors: Shaun K. Roache, Alexander P. Attie
- Published: April 1, 2009
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451872378.001
Overview and Research Question
- Authors: Shaun K. Roache, Alexander P. Attie
- Publication date: April 1, 2009
- Research question: How can long-term investors maintain the purchasing power of their assets over time and achieve a level of real returns consistent with their investment objectives, given limited supply and liquidity of inflation-linked bonds and derivatives?
Data, Methodology, and Scope
- Model: Vector error correction model
- Context: Assessment of inflation-hedging properties of traditional asset classes over different time horizons within a diversified portfolio
- Subjects: Bonds, Currencies, Financial institutions, Financial regulation and supervision, Hedging, Inflation, Money, Prices, Stocks
- Keywords preserved from source: Bonds, break, Currencies, Diversification, Global, Hedging, impulse response, Inflation, inflation sensitivity, inflation shock, inflation-hedging property, Investments, less-than-full inflation compensation, Portfolio Allocation, spot price, Stocks, total return, WP, yield
Key Findings
- Effective short-run hedges, such as commodities, may not work over longer horizons.
- Tactical asset allocation could enhance investment returns following inflation surprises.
- Investors often continue to rely on indirect hedging properties of traditional asset classes because inflation-linked bonds and derivatives have limited supply and liquidity.
Implications for Long-Term Investors
- Reliance on short-run inflation hedges alone can be inadequate for preserving purchasing power over long horizons.
- Incorporating tactical asset allocation after inflation surprises can improve investment outcomes.
- Market limitations in supply and liquidity of inflation-linked instruments necessitate evaluation of traditional asset classes' inflation-hedging properties within a diversified portfolio framework.