Who Needs Inflation Hedging? A Quantitative Analysis Of The Benefits Of Inflation-Linked Bonds, Real Estate And Commodities For Long-Term Investors With Inflation-Linked Liabilities

This paper proposes an empirical analysis of the opportunity gains (costs) involved in introducing (removing) various assets with attractive inflation-hedging properties for long-term investors facing inflation-linked liabilities. Using formal intertemporal spanning tests, we find that interest rate risk dominates inflation risk so dramatically within instantaneous liability risk that introducing or removing inflation-linked bonds, or real estate and commodities, from their liability-hedging portfolio has relatively little impact on investors’ welfare from a short-term perspective.