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Intertemporal hedge for inflation risk
Journal article   Peer reviewed

Intertemporal hedge for inflation risk

Jow-Ran Chang and Mao-Wei Hung
Applied Economics Letters, Vol.9(4), pp.241-243
2002

Abstract

An asset pricing model is developed in which price of consumption good is unknown and investors have a general time and state nonseparable preference. It is shown that the expected return on an asset is determined by a weighted average of market risk, inflation risk and consumption risk. The sum of these weights is equal to one. Moreover, a log-linear approximation proposed by Campbell (1993) to budget constraint is used to substitute out consumption to obtain an asset pricing model with inflation hedging risk. In this setup, expected asset return can be rewritten as a weighted average of market risk, market hedging risk, inflation risk and inflation hedging risk.

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