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Emerging Market Inflation-Linked Bonds

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  • Laurens Swinkels

Abstract

Investigating the value added by inflation-linked bonds in investment portfolios in emerging markets, the author found that the inclusion of inflation-linked bonds improved the risk–return characteristics of investment portfolios in many of the emerging markets. He also found that inflation-linked bond returns correlate more positively with realized inflation than do nominal bonds, even in the short run. Thus, investors should consider adding emerging market inflation-linked bonds to their investment portfolios. I investigated the value added by inflation-linked bonds in an investment portfolio. Recently, several studies have questioned the value added by inflation-linked bonds on the basis of empirical analyses of developed markets only. The disadvantage of using those markets is that they have experienced low and stable inflation rates since the introduction of inflation-linked bonds. In times of low and stable inflation, the inflation protection embedded in inflation-linked bonds does not seem to be beneficial to investors. However, such empirical analyses do not imply that inflation-linked bonds are an unattractive asset class in general. Studying countries that have issued inflation-linked bonds in an environment of higher and more volatile inflation rates can provide useful insights for investors that worry about future inflation risk. Extending the cross section of countries with a set of nine emerging markets, I found that for many of these countries, the inclusion of inflation-linked bonds improves the risk–return characteristics of investment portfolios. This finding implies that investors in developed markets who take into account future scenarios with higher or more volatile inflation rates can also benefit from allocating to inflation-linked bonds. I also documented that inflation-linked bond returns correlate more with realized inflation than do those of nominal bonds, even in the short run. Thus, investors in nominal bonds and equities should also allocate a significant amount to inflation-linked bonds. Furthermore, my mean–variance spanning tests indicate that international investors who already invest in emerging market nominal bonds and equities can benefit from adding emerging market inflation-linked bonds to their investment portfolios.

Suggested Citation

  • Laurens Swinkels, 2012. "Emerging Market Inflation-Linked Bonds," Financial Analysts Journal, Taylor & Francis Journals, vol. 68(5), pages 38-56, September.
  • Handle: RePEc:taf:ufajxx:v:68:y:2012:i:5:p:38-56
    DOI: 10.2469/faj.v68.n5.2
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    Cited by:

    1. Tomek Katzur & Laura Spierdijk, 2013. "Stock returns and inflation risk: economic versus statistical evidence," Applied Financial Economics, Taylor & Francis Journals, vol. 23(13), pages 1123-1136, July.
    2. Spyros Papathanasiou & Dimitris Kenourgios & Drosos Koutsokostas & Georgios Pergeris, 2023. "Can treasury inflation-protected securities safeguard investors from outward risk spillovers? A portfolio hedging strategy through the prism of COVID-19," Journal of Asset Management, Palgrave Macmillan, vol. 24(3), pages 198-211, May.
    3. Arnold, Stephan & Auer, Benjamin R., 2015. "What do scientists know about inflation hedging?," The North American Journal of Economics and Finance, Elsevier, vol. 34(C), pages 187-214.
    4. Monika Chopra & Chhavi Mehta & Aman Srivastava, 2021. "Inflation-Linked Bonds as a Separate Asset Class: Evidence from Emerging and Developed Markets," Global Business Review, International Management Institute, vol. 22(1), pages 219-235, February.
    5. Patricia Gomez-Gonzalez, 2021. "Drivers of inflation-linked public debt: an empirical investigation," International Economics and Economic Policy, Springer, vol. 18(1), pages 223-244, February.
    6. Swinkels, Laurens, 2018. "Simulating historical inflation-linked bond returns," Journal of Empirical Finance, Elsevier, vol. 48(C), pages 374-389.

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