IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/42852.html
   My bibliography  Save this paper

Allocating Commodities in Inflation Hedging Portfolios: A Core Driven Global Macro Strategy

Author

Listed:
  • Fulli-Lemaire, Nicolas

Abstract

Recent academic studies have shown that since the mid-nineties, the passthrough of exogenous oil shocks into headline inflation has been increasing while the passthrough into core inflation seems to have ceased. This paper explores the implications in term of commodity allocation for inflation hedging portfolios these recent works have paved the way for. We proceed by first evidencing a linkage between the headline to core inflation spread and tradable commodities. We subsequently envisage exploiting it threefold: Firstly by devising an efficient strategic allocation using core inflation forecasts to determine the commodities natural weight in the portfolio as dictated by our macro approach. Secondly by testing a tactical allocation strategy which would time the passthrough cycle to determine dynamically the optimal share of commodities in the allocation. And eventually by proposing a strategy to arbitrage core inflation linked derivatives by cross-replicating them with commodity portfolios.

Suggested Citation

  • Fulli-Lemaire, Nicolas, 2012. "Allocating Commodities in Inflation Hedging Portfolios: A Core Driven Global Macro Strategy," MPRA Paper 42852, University Library of Munich, Germany, revised 15 Oct 2012.
  • Handle: RePEc:pra:mprapa:42852
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/42852/1/MPRA_paper_42852.pdf
    File Function: original version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/44041/2/MPRA_paper_44041.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/44055/1/MPRA_paper_44055.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/45775/1/MPRA_paper_45775.pdf
    File Function: revised version
    Download Restriction: no

    File URL: https://mpra.ub.uni-muenchen.de/48038/1/MPRA_paper_48038.pdf
    File Function: revised version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Olivier J. Blanchard & Marianna Riggi, 2013. "WHY ARE THE 2000s SO DIFFERENT FROM THE 1970s? A STRUCTURAL INTERPRETATION OF CHANGES IN THE MACROECONOMIC EFFECTS OF OIL PRICES," Journal of the European Economic Association, European Economic Association, vol. 11(5), pages 1032-1052, October.
    2. Marie Brière & Ombretta Signori, 2011. "Inflation hedging portfolios in different regimes," BIS Papers chapters, in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163, Bank for International Settlements.
    3. Fulli-Lemaire, Nicolas & Palidda, Ernesto, 2012. "Swapping Headline for Core Inflation: An Asset Liability Management Approach," MPRA Paper 42853, University Library of Munich, Germany, revised 16 Nov 2012.
    4. Amihud, Yakov & Mendelson, Haim, 1986. "Asset pricing and the bid-ask spread," Journal of Financial Economics, Elsevier, vol. 17(2), pages 223-249, December.
    5. Olivier J. Blanchard & Jordi Galí, 2007. "The Macroeconomic Effects of Oil Price Shocks: Why Are the 2000s so Different from the 1970s?," NBER Chapters, in: International Dimensions of Monetary Policy, pages 373-421, National Bureau of Economic Research, Inc.
    6. Chen, Shiu-Sheng, 2009. "Oil price pass-through into inflation," Energy Economics, Elsevier, vol. 31(1), pages 126-133, January.
    7. Jose de Gregorio & Oscar Landerretche & Christopher Neilson, 2007. "Another Pass-Through Bites the Dust? Oil Prices and Inflation," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 155-208, January.
    8. David Card & Dean Hyslop, 1997. "Does Inflation "Grease the Wheels of the Labor Market"?," NBER Chapters, in: Reducing Inflation: Motivation and Strategy, pages 71-122, National Bureau of Economic Research, Inc.
    9. Olivier J. Blanchard & Jordi Gali, 2007. "The Macroeconomic Effects of Oil Shocks: Why are the 2000s So Different from the 1970s?," NBER Working Papers 13368, National Bureau of Economic Research, Inc.
    10. Campbell, John Y. & Viceira, Luis M., 2002. "Strategic Asset Allocation: Portfolio Choice for Long-Term Investors," OUP Catalogue, Oxford University Press, number 9780198296942.
    11. Hamilton, James D, 1983. "Oil and the Macroeconomy since World War II," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 228-248, April.
    12. Johansen, Soren, 1988. "Statistical analysis of cointegration vectors," Journal of Economic Dynamics and Control, Elsevier, vol. 12(2-3), pages 231-254.
    13. Todd E. Clark & Stephen J. Terry, 2010. "Time Variation in the Inflation Passthrough of Energy Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(7), pages 1419-1433, October.
    14. Paul van den Noord & Christophe André, 2007. "Why has Core Inflation Remained so Muted in the Face of the Oil Shock?," OECD Economics Department Working Papers 551, OECD Publishing.
    15. James D. Hamilton, 2011. "Historical Oil Shocks," NBER Working Papers 16790, National Bureau of Economic Research, Inc.
    16. Vayanos, Dimitri, 1998. "Transaction Costs and Asset Prices: A Dynamic Equilibrium Model," The Review of Financial Studies, Society for Financial Studies, vol. 11(1), pages 1-58.
    17. Andrews, Donald W K, 1993. "Tests for Parameter Instability and Structural Change with Unknown Change Point," Econometrica, Econometric Society, vol. 61(4), pages 821-856, July.
    18. Granger, C. W. J. & Newbold, P., 1974. "Spurious regressions in econometrics," Journal of Econometrics, Elsevier, vol. 2(2), pages 111-120, July.
    19. Daskalaki, Charoula & Skiadopoulos, George, 2011. "Should investors include commodities in their portfolios after all? New evidence," Journal of Banking & Finance, Elsevier, vol. 35(10), pages 2606-2626, October.
    20. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    21. Hoevenaars, Roy P.M.M. & Molenaar, Roderick D.J. & Schotman, Peter C. & Steenkamp, Tom B.M., 2008. "Strategic asset allocation with liabilities: Beyond stocks and bonds," Journal of Economic Dynamics and Control, Elsevier, vol. 32(9), pages 2939-2970, September.
    22. Fuertes, Ana-Maria & Miffre, Joëlle & Rallis, Georgios, 2010. "Tactical allocation in commodity futures markets: Combining momentum and term structure signals," Journal of Banking & Finance, Elsevier, vol. 34(10), pages 2530-2548, October.
    23. Sue Wing, Ian, 2008. "Explaining the declining energy intensity of the U.S. economy," Resource and Energy Economics, Elsevier, vol. 30(1), pages 21-49, January.
    24. Mr. Shaun K. Roache & Alexander P. Attie, 2009. "Inflation Hedging for Long-Term Investors," IMF Working Papers 2009/090, International Monetary Fund.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Fulli-Lemaire, Nicolas & Palidda, Ernesto, 2012. "Swapping Headline for Core Inflation: An Asset Liability Management Approach," MPRA Paper 42853, University Library of Munich, Germany, revised 16 Nov 2012.
    2. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.
    3. Fulli-Lemaire, Nicolas, 2012. "Alternative Inflation Hedging Portfolio Strategies: Going Forward Under Immoderate Macroeconomics," MPRA Paper 42854, University Library of Munich, Germany.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Fulli-Lemaire, Nicolas, 2013. "Alternative inflation hedging strategies for ALM," MPRA Paper 43755, University Library of Munich, Germany.
    2. Antonio J., Garzón & Luis A., Hierro, 2022. "Inflation, oil prices and exchange rates. The Euro’s dampening effect," Journal of Policy Modeling, Elsevier, vol. 44(1), pages 130-146.
    3. Tiwari, Aviral Kumar & Cunado, Juncal & Hatemi-J, Abdulnasser & Gupta, Rangan, 2019. "Oil price-inflation pass-through in the United States over 1871 to 2018: A wavelet coherency analysis," Structural Change and Economic Dynamics, Elsevier, vol. 50(C), pages 51-55.
    4. Sheng, Xin & Marfatia, Hardik A. & Gupta, Rangan & Ji, Qiang, 2023. "The non-linear response of US state-level tradable and non-tradable inflation to oil shocks: The role of oil-dependence," Research in International Business and Finance, Elsevier, vol. 64(C).
    5. Grzegorz Przekota & Anna Szczepańska-Przekota, 2022. "Pro-Inflationary Impact of the Oil Market—A Study for Poland," Energies, MDPI, vol. 15(9), pages 1-19, April.
    6. Zakaria, Muhammad & Khiam, Shahzeb & Mahmood, Hamid, 2021. "Influence of oil prices on inflation in South Asia: Some new evidence," Resources Policy, Elsevier, vol. 71(C).
    7. Charfeddine, Lanouar & Klein, Tony & Walther, Thomas, 2018. "Oil Price Changes and U.S. Real GDP Growth: Is this Time Different?," QBS Working Paper Series 2018/03, Queen's University Belfast, Queen's Business School.
    8. Ioannidis, Christos & Ka, Kook, 2018. "The impact of oil price shocks on the term structure of interest rates," Energy Economics, Elsevier, vol. 72(C), pages 601-620.
    9. Dipesh Karki & Hari Gopal Risal, 2019. "Asymmetric Impact of Oil Price on Inflation: Evidence from Nepal," NRB Economic Review, Nepal Rastra Bank, Economic Research Department, vol. 31(1), pages 21-46, April.
    10. John Baffes & M. Ayhan Kose & Franziska Ohnsorge & Marc Stocker, 2015. "The Great Plunge in Oil Prices: Causes, Consequences, and Policy Responses," Koç University-TUSIAD Economic Research Forum Working Papers 1504, Koc University-TUSIAD Economic Research Forum.
    11. Abdurrahman Nazif Çatik & Mehmet Karaçuka & A. Özlem Önder, 2022. "The Time-Varying Impact of External Shocks on the Consumer Price Components: Evidence from an Emerging Market," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(4), pages 781-807, December.
    12. Hahn, Elke & Mestre, Ricardo, 2011. "The role of oil prices in the euro area economy since the 1970s," Working Paper Series 1356, European Central Bank.
    13. Sarwar, Muhammad Nadeem & Hussain, Hamid & Maqbool, Muhammad Bilal, 2020. "Pass through effects of oil price on food and non-food prices in Pakistan: A nonlinear ARDL approach," Resources Policy, Elsevier, vol. 69(C).
    14. Reicher, Christopher Phillip & Utlaut, Johannes Friederich, 2010. "The relationship between oil prices and long-term interest rates," Kiel Working Papers 1637, Kiel Institute for the World Economy (IfW Kiel).
    15. Mustafa Kocoglu, 2023. "Drivers of inflation in Turkey: a new Keynesian Phillips curve perspective," Economic Change and Restructuring, Springer, vol. 56(4), pages 2825-2853, August.
    16. Binder, Carola Conces, 2018. "Inflation expectations and the price at the pump," Journal of Macroeconomics, Elsevier, vol. 58(C), pages 1-18.
    17. Zafar Ahmad Sultan & Tarek Tawfek Yousef Alkhateeb & Mahmoud Mohamed Fawaz, 2020. "Empirical Investigation of Relationship between Oil Price and Inflation: The case of India," International Journal of Energy Economics and Policy, Econjournals, vol. 10(3), pages 90-94.
    18. Anderson, Richard G. & Binner, Jane M. & Schmidt, Vincent A., 2012. "Connectionist-based rules describing the pass-through of individual goods prices into trend inflation in the United States," Economics Letters, Elsevier, vol. 117(1), pages 174-177.
    19. Martin Fukac, 2011. "Have rising oil prices become a greater threat to price stability?," Economic Review, Federal Reserve Bank of Kansas City, vol. 96(Q IV), pages 27-53.
    20. Sohrab Rafiq, 2014. "What Do Energy Prices Tell Us About UK Inflation?," Economica, London School of Economics and Political Science, vol. 81(322), pages 293-310, April.

    More about this item

    Keywords

    Inflation Hedging; Portfolio Allocation; Commodities; Core Inflation; Global Macro; Inflation Passthrough; Arbitrage Pricing; Strategic Allocation; Tactical Allocation;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • Q0 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - General
    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:42852. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.