Inflation Tracking Portfolios / Christopher T. Downing, Francis A. Longstaff, Michael A. Rierson.

Format:

Book

Author/Creator:

Downing, Christopher T.

Contributor:

National Bureau of Economic Research.

Longstaff, Francis A.

Rierson, Michael A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w18135.

NBER working paper series no. w18135

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2012.

Summary:

We propose a new approach to constructing inflation tracking portfolios. The key to this approach is the insight that asset returns track expected inflation far better than they track current realized inflation. Thus, we can construct portfolios that track next month's inflation much more closely than they track this month's inflation. We show this staggered hedging approach can eliminate nearly 90 percent of the tracking error of more conventional inflation hedging strategies. We also find that long-short positions in equities play a dominant role in the effective hedging of inflation risk over extended horizons. These results suggest that the goal of protecting portfolios against inflation may be more feasible that is commonly believed.

Notes:

Print version record

June 2012.