An Inflation Hedging Strategy with Commodities: A Core Driven Global Macro
The Journal of Investment Strategies, Risk - Summer Issue, June 2013
51st Euro Working Group on Commodities and Financial Modelling Meeting Paper - London 2013
20th Forecasting Financial Markets Conference Paper - Hannover 2013
Asian Finance Association (AsFA) 2013 Conference Paper - Nanchang 2013
27 Pages Posted: 27 Mar 2012 Last revised: 4 Jul 2013
Date Written: January 24, 2013
Abstract
Recent academic studies have shown that since the mid-nineties, the pass-through of exogenous oil shocks into headline inflation has been increasing while the pass through into core inflation seems to have ceased. This paper explores the implications in terms of commodity allocation for inflation hedging portfolios these recent works have paved the way for. We proceed by first evidencing a link between the headline to core inflation spread and tradable commodities. We subsequently intend to exploit this link in two ways: firstly by devising an efficient strategic allocation using core inflation forecasts to determine the commodities’ natural weight in the portfolio as dictated by our macro approach. And secondly by testing a tactical allocation strategy which would time the pass-through cycle to dynamically determine the optimal share of commodities in the allocation.
Keywords: Inflation Hedging, Portfolio Allocation, Commodities, Core Inflation, Global Macro, Inflation Passthrough, Arbitrage Pricing, Strategic Allocation, Tactical Allocation
JEL Classification: C58, C63, E3, G11, Q02
Suggested Citation: Suggested Citation