Template-Type: ReDIF-Paper 1.0
Series: Tinbergen Institute Discussion Papers
Creation-Date: 2025-10-10
Number: 25-059/IV
Author-Name: Damiaan Chen
Author-Workplace-Name: De Nederlandsche Bank
Author-Name: Roel Beetsma
Author-Workplace-Name: University of Amsterdam
Author-Name: Sweder van Wijnbergen
Author-Workplace-Name: University of Amsterdam
Title: On the Limits of Hedging Inflation Risk in Investment Portfolios
Abstract: We explore to what extent real returns on investment portfolios can be hedged against inflation risk by using existing financial market instruments. We find that inflation-linked bonds offer only limited protection against inflation risk and that nominal debt and stocks play at least comparable roles in this respect. These findings apply to both a static and a dynamic setting. The demonstrated limits of hedging inflation risk are of particular relevance for long-term investors, such as pension funds with participants concerned about the real value of their pension benefits. 
Classification-JEL: C61, E21, G11, G23
Keywords: unhedgeable inflation risk, incomplete markets, welfare loss, mean-variance frontiers, minimum risk portfolio, nominal and index-linked bonds
File-URL: https://papers.tinbergen.nl/25059.pdf
File-Format: application/pdf
File-Size: 2.687.446 bytes
Handle: RePEc:tin:wpaper:20250059