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We decompose long-term nominal bond yields into real and inflation components in an international context using inflation-linked and nominal bonds. In contrast to extant results, real rate variation dominates the variation in inflation-linked and nominal yields. Cross-country nominal and inflation-linked yield correlations have declined since the Great Recession. Real rates are the main source of the correlation between nominal yields. Our results are robust to various alternative measurements of inflation expectations and the liquidity premium. They continue to hold when a no-arbitrage term structure model with real, nominal, and inflation factors is used to effect the yield decomposition. [ABSTRACT FROM AUTHOR]

This theoretical study explores the potential of digital currencies as a hedging tool against inflation risks in the context of globalized economic activity. With the increasing interconnectedness of economies and the volatility of traditional currencies, investors and businesses are seeking alternative ways to protect their wealth from the eroding effects of inflation. Digital currencies, with their unique characteristics such as decentralization and limited supply, have emerged as a potential solution. This research investigates the theoretical underpinnings of using digital currencies for inflation hedging, analyzing their correlation with traditional assets and their performance during periods of high inflation. By examining the factors influencing the effectiveness of digital currencies as a hedge, this study aims to provide insights for investors and policymakers seeking to navigate the complexities of the global economic landscape. [ABSTRACT FROM AUTHOR]

Abstract.This article investigates the robust time-consistent investment strategy for a DC pension plan with model uncertainty under the mean-variance optimization objective. For the avoidance of reductions in investment returns due to inflation risk and premature death of members, an inflation-indexed bond is introduced into the financial market and a return of premium clause is incorporated into the model. By establishing extended Hamilton-Jacobi-Bellman (HJB) equations, the explicit solutions of both the robust precommitment strategy and the robust time-consistent strategy are presented by virtue of the robust optimal control theory and the stochastic dynamic programming approach. Furthermore, two degradation cases are derived in detail. Finally, a numerical example demonstrates the analysis of the obtained results. [ABSTRACT FROM AUTHOR]

This paper studies optimally defined contribution (DC) pension investment problems under the expected utility maximization framework with stochastic income and inflation risks. The member has access to a financial market consisting of a risk-free asset (money account), an inflation-indexed bond, and a stock. The market price of volatility risk is assumed to depend on an affine-form, Markovian, square-root factor process, while the return rate and the volatility of the stock are possibly given by general non-Markovian, unbounded stochastic processes. This financial framework recovers the Black–Scholes model, constant elasticity of variance (CEV) model, Heston model, 3/2 model, 4/2 model, and some non-Markovian models as exceptional cases. To tackle the potentially non-Markovian structures, we adopt a backward stochastic differential equation (BSDE) approach. By solving the associated BSDEs explicitly, closed-form expressions for the optimal investment strategies and optimal value functions are obtained for the power, logarithmic, and exponential utility functions. Moreover, explicit solutions to some special cases of our portfolio model are provided. Finally, numerical examples are provided to illustrate the effects of model parameters on the optimal investment strategies under the 4/2 model. [ABSTRACT FROM AUTHOR]

In this paper, we investigate an optimal investment strategy for defined-contribution (DC) pension plan under hybrid stochastic volatility (Heston--Hull--White) model, taking account of the inflation risk and the stochastic salary. The fund wealth is invested in financial market consisting of a risk-free asset, an inflation-indexed bond and a stock with hybrid Heston--Hull--White model. The goal of the pension fund manager is to maximize the expected utility of the terminal real wealth. We derive the Hamilton--Jacobi--Bellman (HJB) equation through the dynamic programming principle, under the constant relative risk aversion (CRRA) utility function, the optimal investment strategy is obtained. Finally, a numerical example is presented to characterize the impacts of financial parameters on the optimal investment strategy. [ABSTRACT FROM AUTHOR]

Scholars have roundly criticized compulsory consumer disclosure over the past decade for good reason. Disclosures, whether describing the terms of a loan or the risks of investing, purport to inform consumers. But who actually reads disclosures? We argue that mutual fund disclosures are different. Unlike other consumer-facing disclosures, mutual fund disclosures are dynamic and, therefore, informative. The Securities and Exchange Commission (SEC) requires funds to report changing market conditions that affect a fund's investments. As a result, aggregated risk statements provide information about new and evolving risks over and above insights from any single risk disclosure. But disclosures' utility comes not from their superior ability to inform the ordinary investor. Rather, we propose that fund disclosures' true value lies in what they can tell regulators about funds' perception of market risks in the aggregate. We evaluate our thesis through an analysis of all U.S. mutual funds' narrative risk disclosures from 2011 through 2022. We leverage social science theories of risk and uncertainty to conceptualize and operationalize the choices funds make in depicting changing market conditions. We locate these risks and uncertainties along a distribution from common and manageable to uncommon and catastrophic. We then assess funds' disclosure of changing market conditions using a "most likely" case design by examining funds' disclosure of increasing inflation, public health crises, and severe weather events resulting from climate change. Each case study presents either a risk--meaning that the universe of bad outcomes is known and can be accounted for--or uncertainty--meaning that the universe of outcomes is unknown and cannot be meaningfully estimated. We find that, in the aggregate, funds reconceptualize and adjust their disclosures in response to external events. Disclosure topics and language move in predictable and statistically significant ways. Changes in disclosure language are, in fact, meaningful. Such a response, when taken as a whole, provides insight into funds' perception of risk. Our findings suggest that quantitative text analysis can help the SEC assess overall fund compliance with disclosure mandates. But it [ABSTRACT FROM AUTHOR]

We propose a no-arbitrage model of the nominal and real term structures that accommodates the different persistence and volatility of distinct inflation components. Core, food, and energy inflation combine into a single total inflation measure that ties nominal and real risk-free bond prices together. The model successfully extracts market participants' expectations of future inflation from nominal yields and inflation data. Estimation uncovers a factor structure common to core inflation and interest rates and downplays the pass-through effect of short-lived food and energy shocks on inflation and interest rates. Model forecasts systematically outperform survey forecasts and other benchmarks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online. [ABSTRACT FROM AUTHOR]

This paper studies the optimal consumption, investment, and life insurance choices for a wage earner with subjective survival beliefs and habit formation types. The wage-earner has access to a risk-free asset, an index bond, and a stock in a financial market. Introducing subjective survival beliefs describes the wage earner's optimistic or pessimistic attitude towards the longevity risk. Two types of habit formation are considered: one depends on real past consumption; the other is incited by money illusion and depends on nominal past consumption. The aim is to maximize the expected utility of real consumption, total legacy, and terminal wealth, where the utility of consumption comes from the part of real consumption that exceeds real habit level. Using the dynamic programming method, we provide and prove a verification theorem and obtain the closed-form solution of the optimization problem. Numerical results reveal that subjective survival beliefs and habit formation types play important roles in the financial behaviors of the wage-earner. Detailed results are exhibited. Especially, subjective survival beliefs, the existence of habit formation, and the relative risk aversion coefficient affect the demand for life insurance. [ABSTRACT FROM AUTHOR]

Inflation risk poses a significant challenge to strategic asset allocators and is forcing many to reevaluate the suite of quantitative tools they use. In particular, standard simulation methods are inadequate for modeling inflation dynamics and do not generate uncertainty in long-term average inflation. Furthermore, despite low-frequency regime switching between negative and positive stock-bond correlation regimes, linked to inflation dynamics, standard methods do not incorporate this either. Finally, when markets are undergoing long-term structural changes, modeling choices should be able to integrate the forward-looking expectations of subject matter experts on joint economic and market dynamics. This article describes a simple way of retrofitting these features to an existing simulation engine. [ABSTRACT FROM AUTHOR]

In this study, we focused on the development of cooperation between partner countries, which may affect the reduction of inflationary risks for partnership participants in the context of global and urgent changes in the world. This article aims to identify the relationship between inflation indicators and various types of globalization (complex integration indices) of each of the member countries of the Shanghai Cooperation Organization (SCO) in order to develop measures to contain inflation risks in these countries. The authors used the methods of pairwise linear regression, correlation analysis, and multiple linear regression. As variables, the authors used complex indicators that characterize six types of globalization: Economic, financial, demographic, industrial, information, and political indices. The authors concluded that China and India more effectively curb inflation and are less prone to inflation risks. The inflation rate and the independent variables have a close negative correlation, which indicates a strong degree of mutual influence and has a downward effect on the consumer price index. The most significant variables that have a strong influence on the inflation rate are the factors of financial and information integration. The impact of other types of integration considered in this study is not significant. In order to reduce the level of inflationary risks, the SCO member countries most vulnerable to the price volatility of raw materials (Uzbekistan, Tajikistan, and Kyrgyzstan) are encouraged to develop trade cooperation more actively, for example, by reducing or eliminating import duties on raw materials from the SCO countries. [ABSTRACT FROM AUTHOR]

Crude oil markets have become increasingly uncertain. To study them, we first employ the decomposition-ensemble framework based on the variational mode decomposition (VMD) and Lempel–Ziv algorithms to assess the crude oil dual attributes. Three steps are involved: 1) conditional autoregressive value at risk measures the crude oil risk; 2) they are decomposed by the VMD algorithm into submodes; 3) the Lempel–Ziv algorithm is applied to analyze the crude oil risk for each, thereby identifying the oil commodity or oil financial risks. The results of the empirical analysis reveal significantly different amplitudes for the high- and low-frequency crude oil risk. By summarizing the crude oil risk components, we also conclude that the mean value for the oil commodity risk is 0.04, while that for the oil financial risk is 0. What is more, the oil commodity risk is highly related to downward trends in oil prices, while the oil financial risk exerts the same clustering effect as oil returns. [ABSTRACT FROM AUTHOR]

This paper investigates an optimal investment problem for a defined contribution pension plan member who receives a stochastic salary, and considers inflation risk and stock return predictability. The member aims to maximize the expected power utility from her terminal real wealth by investing her pension account wealth in a financial market consisting of a risk-free asset, an inflation-indexed bond and a stock. The expected excess return on the stock can be predicted by both an observable predictor and an unobservable predictor, and the member has to estimate the unobservable predictor by learning the history information. By using the filtering techniques and dynamic programming approach, the closed-form optimal investment strategy and the corresponding value function are derived. Finally, with the help of numerical analysis, we explore the impact of model parameters on the optimal investment strategy, and analyze the welfare benefits from leaning and using inflation-indexed bond to hedge the stock return predictors. [ABSTRACT FROM AUTHOR]

Long‐term bond yields contain a risk premium, an important part of which is compensation for inflation risks. The substantial increase in the Fed funds rate in the mid‐2000s did not raise long‐term US Treasury yields due to the reduction in the term premium (so‐called Greenspan conundrum) which was typically thought to be exogenous for monetary policy. We show using a New Keynesian macro‐finance model that the term premium is endogenous and is greatly influenced by the specification of the Taylor rule. Finally, we estimate our model using various specifications of Taylor rule on US data in 1961–2007 by the generalized methods of moments and evaluate the performance of our model. [ABSTRACT FROM AUTHOR]

It is clear the action of policy makers aimed at supporting the economic recovery, holding up consumption in the short term as well as public investments in the long terms. Furthermore, policy makers exploit a favorable monetary policy as long as inflation allows it. This effect can be surely considered a current and future issue that impacts on the levels of government debt, the sustainability and the new Fed overshooting strategy for inflation (AIT) which makes flexible the optimal 2% target. In terms of portfolio management, these effects are very negative considering both the exposure to government debt and the impact on the credit and equity assets. High levels of inflation are certainly useful in order to manage the debt in real terms, but it could turn to be a risk for portfolio management. This study aims to show how these risks linked with inflation can impact on the value of the different types of investment portfolios characterized by different levels of volatility, different asset classes and equity/corporate factor exposures. Through the application of a composite scenario on several variables, ad-hoc stress tests and scenarios, the article shows the key-role of an ex-ante risk management participation for a proper asset-allocation.

An introduction is presented in which the editor discusses a special issue on multi-asset strategies and asset allocation, which includes the impact of inflation risk on asset allocation, the changing stock-bond correlation, building income-oriented portfolios for retirement.

A simple consumption-based model implies that the inflation risk premium should be high when inflation and growth are more negatively correlated, and vice versa. The authors calculate two measures of inflation risk premium: One is the difference between breakeven inflation and survey-based inflation expectations, and the other is the correlation between survey-based growth and inflation forecasts. They show that both measures imply a small inflation risk premium in recent years. Furthermore, the two measures tend to be positively correlated with each other. [ABSTRACT FROM AUTHOR]

Summary: This paper investigates the role of commodity price information when evaluating inflation risk. Using a model averaging approach, we provide strong evidence of in‐sample and out‐of‐sample predictive ability from commodity prices and convenience yields to inflation, establishing clear point and density forecast performance gains when incorporating disaggregated commodities price information. The resulting forecast densities are used to calculate the (ex‐ante) risk of inflation breaching defined thresholds that broadly characterize periods of high and low inflation. We find that information in commodity prices significantly enhances our ability to pick out tail inflation events and to characterize the level of risks associated with periods of high volatility in commodity prices. [ABSTRACT FROM AUTHOR]

This paper studies an optimal deterministic investment problem for a DC pension plan member with inflation risk. We describe the price processes of the inflation-indexed bond and the stock by a continuous diffusion process and a jump diffusion process with random parameters, respectively. The contribution rate linked to the income of the DC plan member is assumed to be a non-Markovian adapted process. Under the mean-variance criterion, we use Malliavin calculus to derive a characterization for the optimal deterministic investment strategy. In some special cases, we obtain the explicit expressions for the optimal deterministic strategies. [ABSTRACT FROM AUTHOR]

This paper studies the problem of principal-agent with moral hazard in continuous time. The firm's cash flow is described by geometric Brownian motion (hereafter GBM). The agent affects the drift of the firm's cash flow by her hidden effort. Meanwhile, the firm rewards the agent with corresponding compensation and equity which depend on the output. The model extends dynamic optimal contract theory to an inflation environment. Firstly, the authors obtain the dynamic equation of the firm's real cash flow under inflation by using the Itô formula. Then, the authors use the martingale representation theorem to obtain agent's continuation value process. Moreover, the authors derive the Hamilton-Jacobi-Bellman (HJB) equation of investor's value process, from which the authors derive the investors' scaled value function by solving the second-order ordinary differential equation. Comparing with He[1], the authors find that inflation risk affects the agent's optimal compensation depending on the firm's position in the market. [ABSTRACT FROM AUTHOR]

Small and medium enterprises (SMEs) are imperative for the growth of a striving economy because they cater for a huge level of manpower and vast resources. Therefore, it is essential that their stability and performance should be ensured in order to promote the economic growth of Nigeria. SMEs are pronged to unsecured financial risk, which can lead to the collapse of the enterprises. Various studies have been done on the small and medium enterprises’ contribution to the Nigerian economic growth, but only few have addressed how financial risks affect it. This study aims to investigate how financial risk affects SMEs` performance. In other to achieve this exploratory research design was used and data were sourced from Central Bank of Nigeria (CBN) statistical bulletin from 1986 to 2017. The study uses autoregressive distributed lag (ARDL) techniques as the tool of analysis. It reveals a negative and insignificant relationship between financial risk and SMEs` performance in Nigeria in the long run. However, exchange rate risk, liquidity risk, interest rate risk and inflation risk have a significant, but negative impact on small and medium enterprises in the short run, as well as the long run. Financial risk adversely affects the performance of Nigerian SMEs and, therefore, should be controlled to enhance their performance.

In this study, we focused on the development of cooperation between partner countries, which may affect the reduction of inflationary risks for partnership participants in the context of global and urgent changes in the world. This article aims to identify the relationship between inflation indicators and various types of globalization (complex integration indices) of each of the member countries of the Shanghai Cooperation Organization (SCO) in order to develop measures to contain inflation risks in these countries. The authors used the methods of pairwise linear regression, correlation analysis, and multiple linear regression. As variables, the authors used complex indicators that characterize six types of globalization: Economic, financial, demographic, industrial, information, and political indices. The authors concluded that China and India more effectively curb inflation and are less prone to inflation risks. The inflation rate and the independent variables have a close negative correlation, which indicates a strong degree of mutual influence and has a downward effect on the consumer price index. The most significant variables that have a strong influence on the inflation rate are the factors of financial and information integration. The impact of other types of integration considered in this study is not significant. In order to reduce the level of inflationary risks, the SCO member countries most vulnerable to the price volatility of raw materials (Uzbekistan, Tajikistan, and Kyrgyzstan) are encouraged to develop trade cooperation more actively, for example, by reducing or eliminating import duties on raw materials from the SCO countries.

High expected inflation is known to predict low future real growth. We show that, relative to nondurable goods sectors of the economy, such predictability is significantly more pronounced in durable sectors. Consistent with this macroeconomic evidence, the equity returns of durable goods-producing firms have a larger negative exposure to expected inflation risks. We estimate a two-good recursive utility model that features persistent growth fluctuations and inflation nonneutrality for durable and nondurable consumption. Our model can quantitatively account for the levels and volatilities of bond and equity prices, and correlations of equity returns with bond returns and with expected inflation. [ABSTRACT FROM AUTHOR]

This paper investigates whether arbitrage opportunities exist between inflation-linked bonds and nominal bonds on the French Treasury market. Following arbitrage theory, we apply the risk hedging concept: we set up self-financing portfolios hedged against risks through durations of different orders. Perfectly hedged portfolios are those with a zero initial and a zero final value. The results show arbitrage gains when the first three duration orders are implemented, but they are not significantly different from zero when a fourth-order duration is added. Furthermore, a regression of arbitrage gains on the illiquidity measure of nominal and index Treasury bonds provides evidence that the illiquidity of inflation-linked bonds significantly explains arbitrage gains, whereas the illiquidity measure of nominal bonds does not. [ABSTRACT FROM AUTHOR]

The Central Provident Fund (CPF) is a defined-contribution savings plan forming the key pillar of the pension system in Singapore. The CPF Lifelong Income For the Elderly (LIFE) program, which provides lifetime income for retirees, is a mandatory pension scheme for all Singapore residents. In this paper we construct an actuarial framework to analyze the LIFE program. We use this framework to study the plan payout outcomes with respect to changes in mortality and annuity fund return assumptions. We also examine the effects of some possible changes in the program on the payouts and bequests. [ABSTRACT FROM AUTHOR]

Banks in Nigeria experienced dwindling in financial performance as well as financial crisis within the period of the study. Therefore, this study examined the impact of systematic risk on financial performance of listed deposit money banks in Nigeria. Using a sample size of 13 banks for the period of 2007 – 2019, the effect of foreign exchange risk, inflation risk and financial crisis risk on financial performance proxy by return on equity was investigated. Secondary data is collected from the financial statements of the selected banks which was analysed using panel regression. The result of the analysis reveals that foreign exchange risk has positive insignificant relationship with financial performance of banks, inflation risk has positive significant relationship with banks financial performance and financial crisis risk has negative significant relationship on financial performance of Nigerian banks. The study therefore recommends that listed banks in Nigeria should be more cautious in their business operations during inflationary and financial crisis periods. They should also reduce their engagement in foreign exchange business.

This paper investigates a robust optimal portfolio choice problem for a defined contribution (DC) pension plan member. The member worries about model ambiguity and aims to seek robust optimal investment strategies. Specifically, the member has a stochastic salary, considers inflation risk and invests her pension account wealth into a financial market consisting of a risk-free asset, an inflation-indexed bond and a stock whose expected return rate follows a mean-reverting process. By using the dynamic programming approach, the robust optimal investment strategy and the corresponding value function are explicitly derived, and subsequently a verification theorem is provided. Furthermore, two special cases of our portfolio model are discussed. Finally, a numerical example is presented to reveal economic implications of our theoretical results and to illustrate the effects of the model parameters on the robust optimal investment strategy. We find that ambiguity about the dynamics of the inflation-indexed bond price and the stock price and expected return rate has different influences on the robust optimal investment strategy, and that neglecting ambiguity will always lead to utility loss. [ABSTRACT FROM AUTHOR]

Abstract This paper considers a portfolio selection problem with a quadratic utility of consumption, which is symmetric with respect to a bliss point. At bliss point, the utility function has its maximum value and further consumption lowers the utility. In the presence of inflation risk, we introduce an inflation-linked index bond to manage the inflation risk and derive explicit expressions for the optimal consumption and portfolios by applying duality method. Based on quantitative results, we see that inflation-linked index bond plays an important role in choosing consumption and portfolio rules.

Multifaceted, multifactor and multicomponent nature of credit risk makes it possible to consider it as an integral hypothetical unit which consists of the autonomous diverse segments specifying risky situations. As the given article is focused on the mechanism of loan fund circulation within foreign currency loan the author considers the combination of credit, interest rate, foreign exchange and inflation risks within the aggregate (total, combined) credit risk. Foreign exchange and inflation risks generate special interest in relation to evaluation procedures as there can be statutory regulation of interest rate risk and well-functioning mechanism of debt capacity analysis as the main factor of credit risk. As commercial loans and bank credits taken by Russian companies are wide spread the authors of the article suggest an innovative procedure of aggregate credit risk assessment considering agricultural companies, as well as companies belonging to chemical and machine-building industries as «pure borrowers» (debtors). The research has a set sequence of procedures. During the first stage the authors structured a risky situation in the lending process, determined specific constituents and performed their further strategic agreement. The second stage implies the analysis of the possibilities and specific characteristics of the preliminary segment assessment of the risk level. The third stage involves the development of experimental synthetic approach to the segment assessment of the aggregate credit risk in case of foreign exchange rate and interest rate volatility when there are inflation expectations. The procedure considers the following scenarios: 1) isolated assessment of inflation risk; 2) isolated assessment of exchange rate risk; 3) complex assessment of inflation and exchange rate risks.

In this paper, we aim to investigate the mean-variance portfolio selection in an economy with inflation risk. In the financial market, the inflation index can only be partially observed by a signal process. We transform the initial problem into an equivalent completely observed problem. The effect of the partially observed price index on the optimization problem is twofold. Firstly, the equivalent completely observed problem involves more estimation error. Secondly, the mean-variance criterion is distorted. Higher moment is assigned with a bigger weight. The optimization goal does not satisfy the assumption in the Bellman's optimality condition and we derive the equilibrium strategy based on the extended HJB equation. Besides, we also show the results of the efficient frontier and strategy in the precommitment case. In the end of this paper, we present a sensitivity analysis to show the economic behaviors of the investor and compare the efficient strategies and frontiers in precommitment case and equilibrium case. [ABSTRACT FROM AUTHOR]

The Hong Kong Mortgage Corporation (HKMC) Limited, which was established in March 1997 and is wholly owned by the government of the Hong Kong Special Administrative Region, has a major mission to develop and provide different financial retirement instruments to Hong Kong residents to help address the income poverty of retirees. In June 2017, HKMC Annuity Limited, a wholly-owned subsidiary of the HKMC was incorporated to implement a new life annuity scheme which would be launched by mid-2018 to cater for the needs of cash-rich Hong Kong old age residents. The objective of the scheme is to provide an additional financial retirement planning option with minimum credit risk and a certain level of liquidity to the elderly by turning lump-sum premiums into lifetime streams of monthly income at a reasonable and stable return rate. In this paper, we establish an actuarial framework to model this life annuity scheme. The framework enables us to estimate the monthly annuity payments one might receive for a certain amount of investment. It also allows us to analyze the risk entailed in the product, thus shedding light on how the underlying risk can be managed through product design. Our findings will help potential subscribers to understand the scheme and decide whether this scheme should be included in their retirement investment portfolios when it is launched in 2018. [ABSTRACT FROM AUTHOR]