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Hedging inflation risk in a developing economy: The case of Brazil

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  • Marie Briere
  • Ombretta Signori

Abstract

Inflation shocks are one of the pitfalls of developing economies and are usually difficult to hedge. This paper examines the optimal strategic asset allocation for a Brazilian investor seeking to hedge inflation risk at different horizons, ranging from one to 30 years. Using a vector-autoregressive specification to model inter-temporal dependency across variables, we measure the inflation hedging properties of domestic and foreign investments and carry out a portfolio optimisation. Our results show that foreign currencies complement traditional assets very efficiently when hedging a portfolio against inflation: around 70% of the portfolio should be dedicated to domestic assets (equities, inflation-linked (IL) bonds and nominal bonds), whereas 30% should be invested in foreign currencies, especially the US dollar and the euro. © 2012 Elsevier B.V.

Suggested Citation

  • Marie Briere & Ombretta Signori, 2013. "Hedging inflation risk in a developing economy: The case of Brazil," ULB Institutional Repository 2013/167772, ULB -- Universite Libre de Bruxelles.
    • Handle: RePEc:ulb:ulbeco:2013/167772
    Note: SCOPUS: ar.j
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    Cited by:

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    2. Somayeh Madadpour & Mohsen Asgari, 2019. "The puzzling relationship between stocks return and inflation: a review article," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 66(2), pages 115-145, June.
    3. Adekoya, Oluwasegun B. & Oliyide, Johnson A. & Olubiyi, Ebenezer A. & Adedeji, Adedayo O., 2023. "The inflation-hedging performance of industrial metals in the world's most industrialized countries," Resources Policy, Elsevier, vol. 81(C).
    4. 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.
    5. Sharma, Prateek & Vipul,, 2015. "Performance of risk-based portfolios under different market conditions: Evidence from India," Research in International Business and Finance, Elsevier, vol. 34(C), pages 397-411.

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    More about this item

    Keywords

    Inflation hedge; Pension finance; Portfolio optimisation; Shortfall risk;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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