Basis risk and inflation replication

  • Alexander de Roode Alexander de Roode

We study inflation replication in European markets and find that investors can improve their inflation hedge by acquiring foreign inflation-linked derivatives on the international market.Although European inflation-linked bonds holdings have a substantial impact on the inflation hedging ability, their weight in the hedging portfolio is declining over the investment horizon.We show that UK and US inflation-linked bonds can be attractive as well by exploiting long run dynamics of inflation and currency movements. While under stable conditions the replication ability of these portfolios can be improved, uncertainty about long run dynamics may still influence its hedging performance. We confirm with a Bayesian methodology taking into account the uncertainty associated with long run dynamics that during the Financial crisis local nominal bond holdings increased while foreign inflation-linked bonds decreased. While we observe the flight to local securities for inflation hedging investors, European inflationlinked bond holdings remain steady, showing the importance of these bonds in the replication strategy of the investor.

Netspar, Network for Studies on Pensions, Aging and Retirement, is een denktank en kennisnetwerk. Netspar is gericht op een goed geïnformeerd pensioendebat.

MEER OVER NETSPAR


Missie en strategie           •           Netwerk           •           Organisatie           •          Podcasts
Board Brief            •            Werkprogramma 2023-2027           •           Onderzoeksagenda

OVER NETSPAR

Onze partners

vu
NN_logo_gray
B20190901_nidi-logo_greyscale
B20160708_apg
B20160708_ministeries
Bekijk al onze partners