Intertemporal Asset Allocation with Inflation-Indexed Bonds

When one constructs long-term investment plan, one needs to consider the fact that long-term bonds are still exposed to inflation risk. This paper studies the intertemporal portfolio-consumption decision where the investment opportunities include "inflation-indexed bonds" -- a modern financial asset for hedging inflation risks. It is assumed that as well as optimising the agents use non-linear filtering methods to estimate the unobservable variables which drive the asset returns. The model will be calibrated to empirical data. Investment strategies and total utilities will be compared with and without the inflation-indexed bonds