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One Asset Does Not Fit All: Inflation Hedging by Index and Horizon

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Abstract

We examine the inflation-hedging properties of various financial assets and portfolios by estimating simple time-series models of the joint dynamics of each asset-inflation pair, for multiple inflation indices and at horizons from one month to 30 years. There is no one-size-fits-all approach to inflation hedging: the optimal hedge depends on the particular types of prices that an investor is exposed to and at which horizons. For example, food and energy prices are easy to hedge with commodities and certain stock portfolios, while non-housing service prices and wages are not highly correlated with any financial asset. Inflation-protected bonds are good hedges for headline consumer inflation at horizons matching their maturities but can perform quite poorly at shorter horizons and for other price indices. During the inflationary period of 2020-2022, many historical hedging relationships failed, as monetary policy tightening lagged inflation.

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  • Stefania D'Amico & Thomas B. King, 2023. "One Asset Does Not Fit All: Inflation Hedging by Index and Horizon," Working Paper Series WP 2023-08, Federal Reserve Bank of Chicago.
    • Handle: RePEc:fip:fedhwp:96038
    DOI: 10.21033/wp-2023-08
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    References listed on IDEAS

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    1. Andrew Ang & Marie Brière & Ombretta Signori, 2012. "Inflation and Individual Equities," NBER Working Papers 17798, National Bureau of Economic Research, Inc.
    2. Anna Cieslak & Carolin Pflueger, 2023. "Inflation and Asset Returns," NBER Working Papers 30982, National Bureau of Economic Research, Inc.
    3. repec:dau:papers:123456789/7847 is not listed on IDEAS
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    Keywords

    Inflation; real assets; Treasury Inflation-Protected Securities (TIPS); Hedging;
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