Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics

Fulli-Lemaire, Nicolas (2012): Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics. Forthcoming in: Alternative Investment Analyst Review, CAIA No. Summer/Fall (2013)

Abstract

Gone are the days when inflation fears had receded under years of 'Great Moderation' in macroeconomics. The US subprime financial crisis, the ensuing 'Great Recession' and the sovereign debt scares that spread throughout much of the industrialized world brought about a new order characterized by higher inflation volatility, severe commodity price shocks and uncertainty over sovereign bond creditworthiness to name just a few. All of which tend to put in jeopardy both conventional inflation protected strategies and nominal unhedged ones: from reduced issues of linkers to negative long-term real rates, they call into question the viability of current strategies. This paper investigates those game changing events and their asset liability management consequences for retail and institutional investors. Three alternative ways to achieve real value protection are proposed.

• Item Type: MPRA Paper
• Language: English
• Keywords: inflation hedging, portfolio allocation, alternative investment, commodities, real rates, core Inflation, global macro, inflation pass-through, strategic allocation, portfolio insurance, Great Recession
• Subjects: G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G2 - Financial Institutions and Services; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles

References

Amenc, N., Martellini, L., & Ziemann, V. (2009). Inflation-Hedging Properties of Real Assets and Implications for Asset–Liability Management. Journal of Portfolio Management, Summer 2009, Vol. 35, No. 4: pp. 94-110.

Attié, A. P., & Roache, S. K. (2009, April). Inflation Hedging for Long-Term Investors. IMF Working Paper.

Baffes, J., & Haniotis, T. (2010, July). Placing the 2006/08 Commodity Price Boom. World Bank Policy Research Working Paper(5371), 1-42.

Barclays Capital. (2012). Investment flows in commodities markets and the relationship with prices.

Baumeister, C., & Benati, L. (2010, October). Unconventional Monetary Policy and the Great Recession - Estimating the Impact of a Compression in the Yield Spread at the Zero Lower Bound. ECB Working Paper(1258 ), 1-52.

Blanchard, O. (2009, June). The Perfect Storm. Finance & Development IMF, pp. 37-39.

Blanchard, O. J., & Gali, J. (2007, September). The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s? NBER Working Paper(13368).

Bodie, Z. (1983, Spring). Commodity futures as a hedge against inflation. The Journal of Portfolio Management, pp. Vol. 9, No. 3: pp. 12-17.

Bodie, Z. (1988, December). Inflation, Index-Linked Bonds, and Asset Allocation. NBER Working Paper(2793), 1-23.

Brennan, M. J., & Xia, Y. (2002). Dynamic Asset Allocation under Inflation. The Journal of Finance, 1201–1238.

Caceres, C., Guzzo, V., & Segoviano Basurto, M. (2010, May). Sovereign Spreads: Global Risk Aversion, Contagion or Fundamentals? IMF Working Paper(10/120), 1-30.

Clark, T. E., & Terry, S. J. (2010, October). Time Variation in the Inflation Passthrough. Journal of Money, Credit and Banking, 42(7).

D’Amico, S., Kim, D. H., & Wei, M. (2008, February). Tips from Tips: The Informational Content of Treasury Inflation-Protected Security Prices. BIS Working Paper(248).

Dempster, N., & Artigas, J. C. (2010, Fall). Gold: Inflation Hedge and Long-Term Strategic Asset. The Journal of Wealth Management, 13(2), 69-75.

Farmer, R. E. (2011, October). The Stock Market Crash of 2008 Caused the Great Recession: Theory and Evidence. (NBER, Ed.) NBER Working Paper(17479), pp. 1-37.

Fulli-Lemaire, N. (2012). A Dynamic Inflation Hedging Trading Strategy. Journal of Finance & Risk Perspective, 1(2).

Fulli-Lemaire, N. (2013, June). An Inflation Hedging Strategy with Commodities: A Core Driven Global Macro. Journal of Investment Strategies - Risk, Forthcoming.

Fulli-Lemaire, N., & Palidda, E. (2012, August). Swapping Headline for Core Inflation: An Asset Liability Management Approach. Retrieved from SSRN: http://ssrn.com/abstract=2125962

Garcia, J. A., & Van Rixtel, A. A. (2007, June). Inflation-Linked Bonds from a Central Bank Perspective. European Central Bank Occasional Paper Series(62).

Graf, S., Haertel, L., Kling, A., & Ruß, J. (2012, August 9). The Impact of Inflation Risk on Financial Planning and Risk-Return Profiles. Retrieved from Institut für Finanz- und Aktuarwissenschaften Ulm: http://www.ifaulm. de/downloads/The_Impact_of_Inflation_Risk_on_Financial_Planning_and_Risk- Return_Profiles.pdf

Hamilton, J. D. (2011, February). Historical Oil Shocks. NBER Working Paper(16790), 1-52.

Leland, H. E. (1980, Mai). Who Should Buy Portfolio Insurance? The Journal of Finance, 35(2).

Levanon, G., Chen, V., & Cheng, B. (2012). Feeling the Pain: Wage Growth in the United States during and after the Great Recession. The Conference Board.

Li, A., & Zeng, S. (2012, August 6). DB Core US CPI Index. (D. Bank, Ed.) DB Fixed Income Special Report, pp. 1-8.

Mabro, R. (1987). Netback pricing and the oil price collapse of 1986. Oxford Institute for Energy Studies Working Paper, 1-65.

Meltzer, A. H. (2005, March/April ). Origins of the Great Inflation. Federal Reserve Bank of St. Louis Review, 87(2, Part 2), 145-175.

Stock, J. H., & Watson, M. W. (2003). Has the Business Cycle Changed and Why? In M. Gertler, & K. Rogoff (Eds.), NBER Macroeconomics Annual 2002 (Vol. 17, pp. 159-230). MIT Press.

van den Noord, P., & André, C. (2007). Why has Core Inflation Remained so Muted in the Face of the Oil Shock. OECD Papers, 7(4), 1-34.

Zhang, A., Korn, R., & Ewald, C.-O. (2007, October). Optimal management and inflation protection for defined contribution pension plans. Blätter der DGVFM, 28(2), pp. 239-258.