Inflation-Hedging Properties of Real Assets and Implications for Asset–Liability Management Decisions

Abstract

1. Noël Amenc 1. is a professor of finance at EDHEC Business School and the director of EDHEC Risk and Asset Management Research Center in Nice, France. (noel.amenc{at}edhec.edu) 2. Lionel Martellini 1. is a professor of finance at EDHEC Business School and the scientific director of EDHEC Risk and Asset Management Research Center in Nice, France. (lionel.martellini{at}edhec.edu) 3. Volker Ziemann 1. is an economist at the French Ministry of Economy, Industry and Employment in Paris, France. (volker.ziemann{at}dgtpe.fr) <!-- --> 1. To order reprints of this article, please contact Dewey Palmieri at dpalmieri{at}iijournals.com or 212-224-3675. Recent increases in inflation uncertainty have increased investor awareness of the need to hedge against unexpected changes in price levels. Given that the capacity of the inflation-linked securities market is not sufficient to meet the collective demand of institutional and private investors and that the OTC inflation derivatives market suffers from a perceived increase in counterparty risk, investors are now turning to other asset classes to seek inflation protection. Using a vector error correction model that explicitly distinguishes between short-term and long-term dynamics in the joint distribution of asset returns and inflation, the authors show that real estate and commodities have particularly attractive inflation-hedging properties over long horizons and that these properties justify the introduction of these asset classes into pension fund liability-hedging portfolios. These results suggest that novel forms of liability-driven investment solutions, including commodities and real estate in addition to inflation-linked securities, can be designed to decrease the cost of inflation insurance for long-horizon investors. TOPICS: [Pension funds][1], [commodities][2], [VAR and use of alternative risk measures of trading risk][3] [1]: https://www.pm-research.com/topic/pension-funds [2]: https://www.pm-research.com/topic/commodities [3]: https://www.pm-research.com/topic/var-and-use-alternative-risk-measures-trading-risk