CFA Institute

Emerging Market Inflation-Linked Bonds

Author(s): Laurens Swinkels
Source: Financial Analysts Journal, Vol. 68, No. 5 (September/October 2012), pp. 38-56
Published by: CFA Institute
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 Financial Analysts Journal
Volume 68 Number 5
2012 CFA Institute

Emerging Market Inflation-Linked Bonds

Laurens Swinkels

Investigating the value added by inflation-linked bonds in investment portfolios in emerging

markets, the author found that the inclusion of inflation-linked bonds improved the risk-return
characteristics of investment portfolios in many of the emerging markets. He also found that
inflation-linked bond returns correlate more positively with realized inflation than do nominal
bonds , even in the short run. Thus , investors should consider adding emerging market inflation-
linked bonds to their investment portfolios.

mutual funds have been launched that allow port-

become increasingly important for institu-
tional
As become tional an asset investors
investors increasingly
class, emerging around
attractive risk-adjusted returns of emerg-
ing market bonds in investment portfolios have
been documented by many researchers, including
Erb, Harvey, and Viskanta (1999); Fjelstad, Fox,
Paris, and Ruff (2005); Kozhemiakin (2005); and
Chiang, Wisen, and Zhou (2007). To eliminate
exchange rate risk for international investors, many
emerging market governments have issued debt in
nondomestic currency, mostly U.S. dollars. The
issuance of debt in nondomestic currency reduces
the incentive of governments to print extra money
to repay their debt. Printing money increases
domestic inflation and devalues the domestic cur-
rency against the nondomestic currency. Over the
past decade, emerging market governments have
issued more domestic debt in order to be less
dependent on their exchange rates versus the U.S.
dollar. This domestic debt has been issued partly in
inflation-linked bonds, a signal that governments
or central banks are not planning to print money to
repay their domestic currency debt.
Although emerging market governments
have a long history of issuing inflation-linked
debt, until recently, such debt was a relatively
small portion of the total debt outstanding. Over
the past decade, the issuance of inflation-linked
debt has increased substantially. At the end of
2010, the total amount of inflation-linked debt
outstanding was US$82 billion - around 14% of
the total world supply of inflation-linked bonds.
Recently, several global inflation-linked bond
Laurens Swinkels is a portfolio strategist at Robeco
Investments and assistant professor of finance at Eras-
mus School of Economics, Erasmus University Rotter-
dam, the Netherlands.
folio managers to invest in these bonds issued by
around
the
important market world.
the world. for debt institu-The
The has emerging sovereigns.2 The risk-return character-
istics of this asset class, however, have received
little attention in the academic literature. This arti-
cle aims to fill that gap.
Most research on inflation-linked bonds has
focused on developed markets. Developed market
governments have increased their issuance of
inflation-linked debt over the past two decades.
Most studies of these bonds have been confined to
the United Kingdom and the United States (for an
elaborate study of these two markets, see Camp-
bell, Shiller, and Viceira 2009). And the several
studies that empirically investigated the value
added by inflation-linked bonds were hampered
by relatively low, stable inflation in the developed
markets studied. Thus, Hunter and Simon (2005)
and Brire and Signori (2009) found little evidence
that inflation-linked bonds add value to a portfo-
lio of nominal bonds and stocks. Nevertheless, the
question remains: Do inflation-linked bonds add
value in economic environments with more vola-
tile inflation? In my study, I explored the returns
of emerging market bonds to address this ques-
tion in more detail. I focused on allocations to the
entire asset class and made no attempt to construct
active trading strategies in these emerging mar-
kets, as, for example, Andonov, Bardong, and
Lehnert (2010) did for the U.S. inflation-linked
bond market.
The lack of high, volatile inflation in the
United States has led some researchers to esti-
mate hypothetical U.S. inflation-linked bond
returns for inflationary periods by using informa-
tion on the nominal term structure and realized
inflation. Using this longer sample, Chen and
Terrien (2001) and Kothari and Shanken (2004)
found that inflation-linked bonds add value to

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portfolios. The disadvantage of their approach is
that it relies heavily on the method used histori-
cally to estimate the returns on inflation-linked
bonds. In empirically determining the value
added by inflation-linked bonds, I used an
approach that aims not to increase the length of
the sample period in order to find subperiods of
inflation but, rather, to increase the cross section
of countries with different inflation environ-
ments. Thus, my expanded dataset did not
require the historical estimation of real bond
yields to determine simulated returns on hypo-
thetical inflation-linked bonds.
The contribution of my study is twofold. First,
I used a sample of both nominal and inflation-
linked emerging market bonds to better under-
stand the correlation between nominal and
inflation-linked bonds. Bonds issued by emerging
market governments are particularly suited for
such analysis because several emerging market
governments have experienced much higher and
more volatile inflation rates than the developed
market governments that have issued inflation-
linked bonds. Second, I investigated the diversifi-
cation properties of emerging market inflation-
linked bonds for investors that already have expo-
sure to international equity and bond markets. I
analyzed both currency-hedged and non-
currency-hedged emerging market inflation-
linked bonds in detail.
Discussion of findings. My findings suggest
that for most countries, inflation-linked bonds
expand the mean-variance efficient frontier for
investors that hold nominal bonds and equities.
Therefore, investors should allocate part of their
investment portfolios to inflation-linked bonds.
This recommendation applies in a nominal frame-
work with a monthly holding period. In addition,
inflation-linked bonds are better hedges than nom-
inal bonds against realized inflation. Thus, for long-
term investors with goals in real terms, inflation-
linked bonds would likely be even more attractive
than nominal bonds. My findings also suggest that
governments that have not issued inflation-linked
bonds might consider doing so in order to provide
investors with a valuable asset class. Furthermore,
my mean-variance spanning tests indicate that
international investors that already invest in
emerging market nominal bonds and emerging
market equities would benefit from adding emerg-
ing market inflation-linked bonds to their invest-
ment portfolios. This recommendation holds for
both currency-hedged and non-currency-hedged
inflation-linked bonds.
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Emerging Market Inflation-Linked Bonds
Emerging Markets and Inflation-
Linked Bonds
Although several emerging markets have a long
history of issuing inflation-linked debt, the issue
sizes have been small and not directly accessible by
investors. Over the past decade, this picture has
changed considerably. Figure 1 shows that the size,
measured in U.S. dollars, of inflation-linked gov-
ernment debt outstanding has increased sharply
since 2003. From Figure 1, we can see that govern-
ments have issued substantial amounts of inflation-
linked debt over the last 10 years. The total amount
of global inflation-linked government debt out-
standing increased from US$260 billion in January
2003 to more than US$1.3 trillion in January 2011.
The relative size of the issues of inflation-linked
debt by emerging governments has increased over
time. In January 2003, less than 1% of the total face
value outstanding was issued by emerging govern-
ments; in January 2011, that number increased to
more than 14%.
I obtained the data for my study from the
Emerging Markets Government Inflation-Linked
Bond Index (EMGILB) and the World Government
Inflation-Linked Bond Index (WGILB) as provided
by Barclays Capital.3 Introduced in October 2007,
the EMGILB's base date is 31 December 2003,
though some country indices go back even further.
The WGILB was introduced in October 1997, with
a base date of 31 December 1996. Note that Greece
was excluded from the WGILB in December 2009,
following the downgrading of its credit rating.
Launched in 2010, Israel's country index was first
included in the EMGILB in January 201 1 . Neverthe-
less, its country index has been calculated back to
1999, and in order not to leave out a valuable source
of data, I included Israel in the control sample of
developed markets.
In total, nine emerging governments have
issued inflation-linked debt and are covered by the
EMGILB. The most active region has been Latin
America: Argentina, Brazil, Chile, Colombia, and
Mexico have all issued inflation-linked bonds. The
other emerging governments - Poland, South
Africa, South Korea, and Turkey - are spread out
over the rest of the world. The data on inflation-
linked bonds that I used in my study were limited
to those bonds that met all requirements to be
included in their country indices. The bonds had to
be issued by the state government (not by quasi-
government institutions) and had to meet certain
minimum issue size requirements that varied from
country to country.4 Appendix A and Appendix B
present an overview of each of the individual bond
issues included in my analysis.
Financial Analysts Journal
Figure 1 . Inflation-Linked Government Debt Outstanding,
December 1996-January 2011
Source : Barclays Capital.
Figure 2 shows the relative amount of inflation-
linked debt for each emerging market, measured by
th total face value of inflation-linked debt issued
by these governments. We can see that Brazil is by
far the largest issuer, with close to 50% of the total
amount outstanding in 2011. Investors that follow a
market capitalization-weighted emerging market
inflation-linked bond index should take into
account that they have a large exposure to Brazil.5
To prevent this large exposure from dominating my
results, I analyzed each country separately.
Table 1 reports the descriptive statistics from
my emerging market dataset, which includes total
returns, in local currencies, on inflation-linked
bonds, nominal bonds, and equities for various
countries. So-called comparator bond indices are
available for several countries. Created by Barclays
Capital as a way to compare investing in nominal
bonds with investing in inflation-linked bonds,
these indices contain government bonds with
maturities similar to those of the bonds in the
inflation-linked bond index and with the same
index weights as the bonds in the inflation-linked
bond index. This feature makes them close substi-
tutes for investors who want to compare the per-
formances of nominal and inflation-linked bonds.
However, investors should be aware of several
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important differences between these two indices.
First, the bonds in the nominal and inflation-linked
indices might not be equally liquid. Second, invest-
ing in inflation-linked bonds, in principle, has the
same credit risk as investing in nominal bonds
issued by the same government. Nevertheless,
investing in inflation-linked bonds involves addi-
tional credit risk because the cash flows are paid
later in the bonds' lives owing to the inflation uplift.
Third, investors' net return is influenced by the tax
treatment of nominal versus inflation-linked
bonds. Tax differences could arise because of dif-
ferences in investor status (e.g., private versus insti-
tutional) or because of bilateral country tax rules.
For example, in countries where investors are taxed
on coupon payments and not the notional amounts,
inflation-linked bonds are attractive because of the
lower coupon and higher inflation-adjusted princi-
pal. In countries where the inflation uplift is taxed
in the year it accrues, investors might find it disad-
vantageous to be taxed yet not receive any payment
from the inflation-linked bond. Although taxes
might affect the prices of bonds, I did not take these
differences explicitly into account in my analysis.
For those countries for which no comparator
bond index is available, I used index data provided
by J.P. Morgan. Argentina was the only country for
2012 CFA Institute
 Emerging Market Inflation-Linked Bonds

Figure 2. Relative Amount of Inflation-Linked Debt Issued by Emerging

Governments, January 2004-^January 2011

Source: Barclays Capital.

Notes: The relative amount is the total face value, measured in U.S. dollars, issued by the country divided
by the total face value of inflation-linked bonds outstanding in emerging markets on that date. The
relative amounts for Colombia and Chile are not depicted because they are extremely small compared
with those for the other countries.

which I was unable to find an appropriate index to
compare nominal and inflation-linked bonds. For
the local equity markets, I used country indices
provided by Morgan Stanley Capital International
and obtained these series through Thomson
Reuters Datastream. Note that Table 1 contains
numbers calculated over different sample periods
for each country. The existence of an inflation-
linked bond market determined the sample start-
ing date of the calculations.
Table 1 shows that the annual average local
return on bonds over the country-specific sample
period has ranged considerably among the coun-
returns) between 5% and 10%, whereas equity mar-
ket volatilities are typically larger than 20%. No
clear pattern exists that would suggest that
inflation-linked bonds are more or less risky than
nominal bonds as measured by the volatility or
minimum return over one calendar month. Table 1
also shows that the average returns and volatilities
are generally lower for developed markets than for
emerging markets. The budgetary problems in
Greece have resulted in the lowest returns and high-
est volatilities.
Table 1 also reports the average maturities of
the nominal and inflation-linked bond indices.

tries. For example, annual average bond returns in
Chile and South Korea have been close to 5%,
whereas annual average bond returns in Argentina
and Turkey have exceeded 20%. For all countries
except Turkey, equity returns have exceeded bond
returns, albeit with substantially higher volatility.
Most bond indices have volatilities (measured by
the annualized standard deviation of monthly
Many inflation-linked bond indices have maturi-
ties close to 10 years, reflecting the desire of long-
term investors to be protected against inflation
risks. Turkey is the exception, with an average
maturity of less than four years for its inflation-
linked bonds. Among developed markets, Canada
and Greece have the longest average maturities,
close to 20 years.

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Financial Analysts Journal

Table 1 . Descriptive Statistics, January 1 997-January 201 1

Average Median Volatility Minimum Maximum Maturity
Asset Class (%) (%) (%) (%) (%) (years)
Argentina Inflation 8.4 8.8 2.4 2.3 12.3
- Nominal - - - - - -

Ian/04 Infl-link 28.8 27.9 39.7 -58.1 44.3 11.0

Jan/04 Equities 31.0 34.2 35.9 -37.0 25.9 -
Brazil Inflation 5.5 5.3 1.7 3.0 14.0 -

Sep/05 Nominal3 16- 1 5-1 16-6 "15-8 20-3 1Z1

Oct/ 03 Infl-link 16.0 14.5 5.5 -3.3 6.4 10.1
0ct/03 Equities 24.0 33.4 24.8 -25.1 18.6 -
Chile Inflation 3.3 2.9 2.7 -2.3 9.9 -

Dec/02 Nominal3 3-7 2.8 4.4 -4.4 4.6 5.5

Oct/ 02 Infl-link 6.2 7.0 4.1 -3.4 3.0 6.2
Oct/ 02 Equities 21.6 23.3 15.7 -9.5 15.8 -
Colombia Inflation 5.2 5.3 1.7 1.8 7.9 -

Feb/05 Nominal3 14-1 19-1 14-1 -10-6 13-8 8-8

Jan/03 Infl-link 12.7 13.2 6.5 -4.1 6.6 5.9
Jan/03 Equities 35.7 34.6 25.5 -21.4 20.5 -
Mexico Inflation 4.4 4.2 0.8 2.9 6.5 -

Feb/03 Nominal3 99 117 5-8 -4-1 63 64

Feb/03 Infl-link 10.8 12.7 6.8 -5.4 6.7 10.8
Feb/03 Equities 24.6 37.3 19.1 -20.0 12.8 -
South Korea Inflation 3.3 3.1 1.1 1.6 5.9 -

Apr/07 Nominal 3.6 2.6 4.7 -3.2 3.6 7.2

Apr/07 Infl-link 8.3 9.8 9.5 -7.9 11.2 8.2
Apr/07 Equities 14.5 25.9 24.6 -21.0 14.4 -
Poland Inflation 2.9 3.0 1.3 0.5 5.0 -
Feb/05 Nominal 4.8 5.2 7.1 -8.0 6.0 8.7
Sep/04 Infl-link 7.6 6.9 6.2 -6.7 9.8 8.8
Sep/04 Equities 13.7 31.5 26.3 -23.9 19.6 -
South Africa Inflation 6.0 5.8 3.2 0.2 13.7 -

Apr/00 Nominal 12.3 13.7 9.3 -6.1 12.4 13.0

Apr/00 Infl-link 12.9 11.1 4.4 -2.1 4.6 12.6
Apr/00 Equities 16.4 14.1 19.8 -16.3 14.1 -
Turkey Inflation 8.4 8.4 2.0 4.9 12.1 -
Mar/07 Nominal 20.3 17.6 14.5 -9.2 12.1 3.4
Mar/07 Infl-link 22.3 25.6 13.8 -16.9 13.3 3.9
Mar/07 Equities 16.5 28.3 34.6 -23.5 23.5 -
Australia Inflation 2.6 2.7 1.4 -0.4 6.0 -

Jan/97 Nominal 6.9 5.3 6.1 -3.9 7.1 9.0

Jan/97 Infl-link 7.2 6.9 4.8 -3.7 3.9 12.2
Jan/97 Equities 9.7 17.2 13.5 -11.1 8.9 -
France Inflation 1.6 1.7 0.8 -0.7 3.6 -

Oct/98 Nominal 5.0 6.8 4.8 -2.6 4.5 10.8

Oct/98 Infl-link 5.3 6.5 4.6 -4.8 5.8 11.1
Oct/98 Equities 6.6 16.8 18.9 -16.0 13.5 -

Germany Inflation 1.6 1.5 1.0 -0.5 3.3 -

Apr/06 Nominal 4.7 5.4 4.3 -1.6 3.4 6.9
Apr/06 Infl-link 4.6 3.8 4.8 -4.6 5.7 7.2
Apr/06 Equities 4.8 17.2 20.8 -14.9 17.4 -
(continued)

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 Emerging Market Inflation-Linked Bonds

Table 1. Descriptive Statistics, January 1997-January 2011 (continued)

Average Median Volatility Minimum Maximum Maturity
Asset Class (%) (%) (%) (%) (%) (years)
Greece Inflation ^2 ^ 12 05 56 ==
Apr/03 Nominal 0.0 1.7 12.0 -15.3 8.8 19.2
Apr/03 Infl-link -1.5 4.8 18.1 -22.1 22.9 19.5
Apr/03 Equities 8.6 19.8 30.7 -29.9 24.9 -
Israel Inflation 2.4 2.4 2.4 -2.7 8.6 -
Dec/98 Nominal 7.7 7.7 5.9 -2.5 5.9 7.2
Dec/98 Infl-link 5.8 5.7 5.5 -4.0 6.4 9.0
Dec/98 Equities 12.1 18.2 23.0 -17.7 26.1 -

Italy Inflation 2.0 2.0 0.8 0.0 4.1 -

Oct/ 03 Nominal 4.0 5.9 3.9 -4.5 3.1 9.1
Oct/ 03 Infl-link 3.7 8.3 5.4 -6.7 4.0 9.5
Oct/ 03 Equities 4.7 12.7 18.9 -15.4 19.4 -
Sweden Inflation 1.2 1.2 1.2 -1.6 4.4 -

Jan/97 Nominal 6.6 7.8 5.5 -4.0 5.1 9.9

Jan/97 Infl-link 6.3 6.6 4.5 -3.6 3.5 12.4
Jan/97 Equities 12.9 12.8 25.2 -18.4 22.5 -
U.K. Inflation 2.8 3.0 1.4 -1.6 5.3 -

Jan/97 Nominal 7.1 6.3 6.3 -5.6 6.2 14.9

Jan/97 Infl-link 7.1 7.0 6.4 -7.3 9.6 16.1
Jan/97 Equities 6.8 12.8 15.0 -12.9 9.2 -

Japan Inflation -0.1 -0.1 1.0 -2.5 2.3 -

Apr/04 Nominal 2.4 2.3 3.3 -2.8 2.7 8.4
Apr/04 Infl-link 1.6 2.9 6.3 -9.7 4.0 8.3
Apr/04 Equities 0.1 4.7 19.1 -21.1 12.6 -
Canada Inflation 1.9 2.0 0.9 -1.0 4.7 -

Jan/97 Nominal 8.0 8.3 6.9 -3.7 7.5 22.2

Jan/97 Infl-link 8.1 9.5 7.2 -10.0 8.8 23.8
Jan/97 Equities 10.5 17.9 17.2 -18.8 12.8 -
U.S. Inflation 2.4 2.3 1.3 -2.1 5.6 -
Mar/97 Nominal 6.6 6.9 6.7 -6.4 7.3 11.0
Mar/97 Infl-link 6.6 6.5 6.0 -8.3 5.9 10.8
Mar/97 Equities 6.7 14.6 16.8 -17.1 10.0 -
Notes: The first column contains the country-specific sample period. For each country, this table reports statistics on the local inflation
rate (Inflation), local nominal bond index (Nominal), local inflation-linked bond index (Infl-link), and local equity market (Equities)
for the country-specific starting date to January 2011. The nominal bond indices for Brazil, Chile, Colombia, Mexico, and Poland start
later than the inflation-linked bond series, indicated by the dates for those series. The local equity returns are from Morgan Stanley
Capital International. The table reports the annualized monthly average return, annualized median return, annualized standard
deviation (Volatility), minimum and maximum monthly returns, and average maturity of the bonds in the index.
aNo comparator index available; data are from J.P. Morgan's nominal bond index.

From Table 1, we can also see the difference in
average realized returns between nominal and
inflation-linked bonds. The difference between the
two can be interpreted as the inflation risk pre-
mium. Although the magnitude of the inflation risk
premium is difficult to determine empirically, it is
generally estimated to be around 0.5% to 2.0% a
year (see, e.g., Bekaert and Wang 2010). The nomi-
nal and inflation-linked bond indices do not have
exactly the same characteristics but are closely
matched alternatives that are attainable investment
portfolios. One should be careful with respect to
some countries because the sample starting dates
for nominal and inflation-linked bonds are not
always the same. When the inflation risk premium
is positive, the average returns of inflation-linked
bonds should be lower than those of matched nom-
inal bonds. Over the sample period under consid-
eration, the inflation risk premium for most
countries, whether developed or emerging, has

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Financial Analysts Journal
apparently been negative and close to zero because
the average return of inflation-linked bonds has
been somewhat higher than that of nominal bonds.
Even though the set of emerging markets is more
prone to inflation risks than are developed markets,
I found little empirical evidence of the existence of
a positive inflation risk premium. Theoretically, the
size of the risk premium of an asset class should
depend on the covariance with the stochastic dis-
count factor. An inflation risk premium would be
consistent with inflation-linked bonds paying off in
bad economic conditions. Therefore, when the total
wealth of a country goes down, the return on an
inflation-linked bond should be positive.
The average differential return between the
nominal and inflation-linked bond indices is -1.5%
a year for emerging markets and 0.4% for devel-
oped markets. Although the sample period is short,
my results do not seem to support the existence of
a larger inflation risk premium for emerging mar-
kets. One of the reasons for a relatively low differ-
ential return between nominal and inflation-linked
bonds could be the relative illiquidity of inflation-
linked bonds compared with nominal bonds. The
existence of an illiquidity premium would increase
the required return on inflation-linked bonds (for a
decomposition of U.S. and U.K. index-linked bond
returns into inflation risk and illiquidity premiums,
see Pflueger and Viceira 2011). Another possible
reason for return differences could be the higher
credit risk an inflation-linked bond investor is
exposed to because the cash flows of such bonds
are more back-loaded. Also, differences in tax treat-
ment could affect the relative pricing of nominal
and inflation-linked bonds.
One reason for investors to shy away from
inflation-linked bonds is that their value depends
on figures from the consumer price index as
reported by the national statistics office. For some
countries, especially emerging markets, investors
may worry about the independence of both the
national statistics office, which calculates inflation
rates, and the state treasury, which has to pay
inflation-adjusted cash flows, potentially leading to
compromised inflation rates. This governance risk
must be taken into account and could lead to higher
inflation risk premiums.6
Table 1 also displays the characteristics of the
inflation rate in each country over the period when
inflation-linked bonds were available. The devel-
opment of inflation over time is shown graphically
in Figure 3, which depicts the realized domestic
inflation rates that are based on the consumer price
indices of these countries. I obtained the inflation
series from the International Financial Statistics
database of the International Monetary Fund
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through Thomson Reuters Datastream.7 We can see
that some countries have had relatively stable and
low inflation rates. For example, Mexico's inflation
rate was close to 5% for the entire sample period.
Other countries experienced large fluctuations in
inflation rates over this relatively short period. For
example, inflation in South Africa was below 1% in
2004 and close to 15% in 2008, declining to below
5% in 2010. The pattern of Chile's inflation is similar
to that of South Africa's, although it peaked close
to 10% in 2008 and had a period of deflation in 2009.
The differences between inflation rates in
emerging markets are substantially larger than
those in developed countries that issue inflation-
linked debt. The inflation rates of developed mar-
kets are shown in Figure 4. These cross-sectional
differences in inflation movements can be used to
extract valuable information on countries that have
historically experienced stable inflation but that
might experience higher and more volatile inflation
in the future.
Diversification Benefits for Local
Investors
I investigated the value added by investing in
inflation-linked bonds for local investors in coun-
tries that have issued them. Bodie (1990) suggested
that (privately issued) inflation-linked bonds are an
attractive asset class for such long-term investors as
pension funds.8 Hunter and Simon (2005) and Brire
and Signori (2009) found little empirical evidence
that inflation-linked bonds add value to a portfolio
of nominal bonds and stocks.9 However, they con-
sidered only developed markets with relatively low
and stable inflation rates. I explored whether
inflation-linked bonds add more value for investors
who face higher and more volatile inflation rates.
Assuming constant real yields implies that
when nominal yields change, that change is caused
fully by changes in break-even inflation. Break-
even inflation is the difference between the nomi-
nal and the real interest rate on the same bond and
largely consists of expected inflation, the inflation
risk premium, and the illiquidity risk premium.
The correlation between nominal and inflation-
linked bond returns is zero when real yields are
constant. But when break-even inflation is constant
and nominal and real yields move alike, the corre-
lation between nominal and inflation-linked bond
returns equals 1. In the latter case, investors have
no need to buy inflation-linked bonds because they
add no value to an investment portfolio.
Table 2 reports the local correlations of nominal
government bonds, inflation-linked government
bonds, and equities. For ease of comparison, the top
2012 CFA Institute
 Emerging Market Inflation-Linked Bonds

Figure 3. Inflation Rates for Emerging Governments Issuing Inflation-Linked

Debt, December 2003-January 2011

Sources : Thomson Reuters Datastream; IMF International Finance Statistics.

rows concern the emerging markets and the bottom
rows contain the numbers for developed markets.
These asset classes are denominated in local curren-
cies to represent the opportunity set of investors that
are willing or constrained to invest solely in their
home country. The correlations between nominal
and inflation-linked bonds vary substantially across
countries. This variation may depend on the differ-
ent periods under consideration as well as the infla-
tion regime and real interest rate changes in each
country. For example, the correlation for Chile is
0.81, and the correlation for South Africa is 0.08. The
correlations between nominal bonds and equities
and between inflation-linked bonds and equities
also tend to be substantially different across coun-
tries. For Brazil and Turkey, the correlations
between inflation-linked bonds and equities are rel-
atively high, at 0.48 and 0.51, whereas for Chile and
South Africa, the correlations are slightly negative,
at -0.11 and -0.14. These differences in ex post corre-
lations may reflect the difficulty that investors face
when trying to determine the ex ante parameters on
which to build their optimal investment portfolios.
In examining whether inflation-linked bond
returns are correlated with a country's total wealth,
I proxied each country's wealth portfolio by adding
the total value of nominal bonds, inflation-linked
bonds, and equities. The wealth portfolios can vary
substantially, depending on the development of
bond and equity markets in each country. Theoret-
ically, the inflation risk premium should be related
to the covariance with the stochastic discount factor.
The correlations between the inflation-linked bond
returns and the returns on the wealth portfolios are
also shown in Table 2. The relationship between the
observed inflation risk premiums and correlations
between a country's wealth portfolio and inflation-
linked bond returns is virtually zero. This finding
suggests that covariance with the country's wealth
portfolio cannot explain the differences between
nominal and inflation-linked bond returns.
Because inflation-linked bonds are designed to
protect investors from rising inflation, they are a real
fixed-income asset. Higher-frequency pricing of
inflation-linked bonds is influenced by inflation
expectations rather than inflation realizations. It is,
however, relevant for investors to know whether the
returns on investments in inflation-linked bonds
move more in line with inflation than do their nomi-
nal counterparts.10 Therefore, I investigated whether

September/October 2012 www.cfapubs.org 45

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Financial Analysts Journal

Figure 4. Inflation Rates for Developed Governments Issuing Inflation-

Linked Debt, December 2003-January 2011

Note: HICPxT represents the Harmonized Index of Consumer Prices excluding tobacco
Sources: Thomson Reuters Datastream; IMF International Finance Statistics.

the excess return of inflation-linked bonds relative to
nominal bonds is related to the realized inflation in a
particular country. I estimated the regression
rILB _ rNOM =OL + pINFLt + e
to explore this matter in more detail. Table 3 reports
the estimation results for in this regression equa-
tion at a monthly and quarterly frequency. A signif-
icantly positive beta indicates that inflation-linked
bonds are a better hedge against inflation risk than
nominal bonds. Table 3 shows that the excess
returns of inflation-linked bonds are indeed posi-
tively related to realized inflation for six of the eight
emerging markets at the monthly frequency and for
all eight at the quarterly frequency In four cases,
the positive relationship is also statistically signifi-
cant. For developed markets, the results are quali-
tatively similar to those for emerging markets.
Thus, investors who are willing to protect their
purchasing power are better off investing in
inflation-linked bonds than in nominal bonds.
To test whether investing in inflation-linked
bonds improves the portfolio characteristics for
investors, I conducted a mean-variance spanning
test for each country separately. To test for mean-
variance spanning, I used the regression frame-
work of Huberman and Kandel (1987), further
explained by DeRoon and Nijman (2001). For each
country, I estimated the regression
*;=a + M/"0M+2*, + e,,
where RltLB , R^0M , and Rf are the total returns
on inflation-linked bonds, nominal bonds, and
equities, respectively, in period 1. 1 used Newey and
West (1987) standard errors to correct for heterosce-
dasticity and autocorrelation.
I used a Wald test to check for the mean-
variance spanning restriction that a = 0 and i + 2
= 1. The p-values from this Wald test are reported in
Table 2 in the column "Both"; the p-values of both
restrictions are also shown separately. The mean-
variance spanning test is rejected for six of the eight
emerging markets. Thus, inflation-linked bonds
added no value to a portfolio of domestic nominal
bonds and equities for only two markets: South
Korea and Mexico. Because South Korea's data
series starts in April 2007, the sample period is prob-
ably too short to reject the null hypothesis of mean-,
variance spanning. For Mexico, the high p-value is

46 www.cf3pubs.or9 2012 CFA Institute

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 Emerging Market Inflation-Linked Bonds

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Financial Analysts Journal

Table 3. Correlations of Relative Returns of also due to the relatively high correlation between
Inflation-Linked Bonds with Realized inflation-linked bonds, on the one hand, and nomi-
Inflation Rates nal bonds and equities, on the other hand. For devel-
Country Monthly Quarterly oped markets, the null hypothesis of mean-variance
Brazil 5.2* 2.0*
spanning is rejected for 7 of the 11 countries. Overall,

Chile 0.7* 0.7*

these results suggest that investors in both the
domestic equity market and the nominal bond mar-
Colombia 3.8* 0.8
ket can expand their efficient frontier by adding
Mexico -0.8 0.5
inflation-linked bonds to their portfolios. This effect
South Korea 0.0 1.4
seems to be somewhat stronger for emerging mar-
Poland 0.5 1.4* kets than for developed markets.
South Africa 1.6* 2.4* Figure 5 depicts the relationship between infla-
Turkey 0.8 0.5 tion risk (measured by volatility of inflation, on the x-
Australia -0.3 0.9 axis) and the diversification benefits of nominal and
France 1.4* 1.7* inflation-linked bonds (measured by the correlation,
Germany 1.5* 1.9 on the y-axis). No clear relationship seems to exist
between inflation risk and the correlation between
Greece 0.0 -0.1

Israel 2.0* 0.8

nominal and inflation-linked bond returns. By itself,
this finding is surprising because more realized infla-
Italy 1.0* 2.2*
tion changes would seem to hurt nominal bond inves-
Sweden ' 2.0* 1.1* tors whereas inflation-linked bond investors should
U.K. 1.8* 1.0*
benefit. Apparently, simultaneous real interest rate
Japan -0.8 1.0 changes can still result in high correlations between
Canada 2.6* 3.0* nominal and inflation-linked bond returns. Thus, the
U.S. 1.5* 1.9* conclusion that inflation-linked bonds do not have

Note: This table reports the beta estimates of the regression with
a dependent variable (the excess returns of inflation-linked
bonds over comparable nominal bond returns) on a monthly
and quarterly basis: r}lb - R?0M = a + INFLt + e,.
*Significant at the 5% level.
diversification benefits - drawn by Hunter and
Simon (2005) and Brire and Signori (2009) - turns
out to depend heavily on the behavior of the real
interest rate in combination with the inflation regime.
Their results do not seem to carry over to all other
markets that issued inflation-linked bonds.

Figure 5. Inflation Risk and Diversification Benefits of Inflation-Linked Bonds

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Diversification Benefits for
International Investors
Having investigated the portfolio problem from a
domestic investor's perspective, I then examined
the value added by emerging market inflation-
linked bonds for international investors.11
I started by investigating the correlation of the
returns of the inflation-linked bonds from emerg-
ing markets when the returns are converted to U.S.
dollars instead of local currency, as previously ana-
lyzed. Although currency hedging is not always
easy to do in emerging markets, I also investigated
the correlation between returns hedged to U.S. dol-
lars to eliminate the currency effects that interna-
tional investors face. The correlations are reported
in Table 4. The upper diagonals (indicated by bold-
face) contain the correlations for returns converted
to U.S. dollars, and the lower diagonals show the
correlations hedged to U.S. dollars.
The correlations of the open (not currency-
hedged) returns are generally positive but substan-
tially below 1, ranging from 0.29 to 0.69. The aver-
age pairwise correlation for the emerging markets
is 0.49. These correlations indicate that substantial
benefits can be obtained from international diver-
sification. For currency-hedged returns, the diver-
sification benefits are even larger: The average
pairwise correlation equals 0.14 and is negative for
many country combinations.
The benefits of diversification are reflected in
the lower volatility of the total market index com-
pared with the average volatility of each country
separately. The equally weighted average volatility
for the open currency series is 21% a year, whereas
the annual index volatility is less than 15%.12 The
volatility reduction in the currency-hedged series
is even larger, with an annual average volatility of
10.9%, compared with the annual index volatility
of 6.2%.
Finally, I again used the mean-variance regres-
sion framework to determine the value of adding
emerging market inflation-linked bonds to the U.S.
investor's portfolio of developed market nominal
bonds, developed market inflation-linked bonds,
emerging market nominal bonds, and emerging
market equities. The regression equation is
rEMLB =a + iRDEVNM +hRDEVEQ
+ hREMNOM +p4REMEQ
+ 5rPevilb+^
where REMLB (r?evilb), RtEMNOM (r?evnom),
and r^meQ ^reveQ j are the returns on emerging
September/October 2012
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Emerging Market Inflation-Linked Bonds
market (developed market) inflation-linked bonds,
nominal bonds, and equities.
Table 5 presents the estimation results, both on
a country-by-country basis and for the emerging
market inflation-linked bond index as a whole. We
can see that for all but two countries (South Korea
and South Africa), the mean-variance spanning
test is rejected. This result also holds for the entire
emerging market inflation-linked bond index as an
asset class and is robust to hedging the currency
risk. By hedging the currency risk, the betas with
respect to the emerging market equities and devel-
oped market inflation-linked bonds decrease. Both
of these basic asset classes are not currency hedged.
Thus, the higher betas might be due to the common
currency effect instead of the movement of the
underlying market itself.
Figure 6 depicts the mean-variance frontiers
for international investors with and without the
opportunity to invest in emerging market inflation-
linked bonds. I did not allow investors to have short
positions in any of the asset classes. Over January
2004-January 2011, investors with higher risk aver-
sion benefited most from including emerging mar-
ket inflation-linked bonds. The portfolio risk is
reduced from 2.5% a month to 1.7% for an investor
requiring a 0.7% monthly return. The portfolio
optimization indicates that 81% of the portfolio
should be invested in emerging market inflation-
linked bonds. For investors willing to take more
risk, the value added by emerging market inflation-
linked bonds is less appealing because the volatility
is reduced less and the portfolio weight also
declines. For an investor requiring a 1.3% monthly
return, the portfolio risk decreases from 5.5% a
month to 5.2% and the weight in emerging market
inflation-linked bonds is 34%. From this analysis,
we can see that the value added by emerging mar-
ket inflation-linked bonds is in line with the mean-
variance spanning tests presented earlier.
To summarize, from Table 4 and Figure 6, we
can see that emerging market inflation-linked
bonds also extend the mean-variance frontier for
an international investor who already invests in
global bond and equity markets.
Conclusion
I investigated the value added by inflation-linked
bonds in an investment portfolio. Recently, several
studies have questioned the value added by
inflation-linked bonds on the basis of empirical anal-
yses of developed markets only. Extending the cross
section of countries with a set of nine emerging mar-
kets, I found that for many of these countries, the
inclusion of inflation-linked bonds improves the
www.cfapubs.org 49
Financial Analysts Journal

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 Emerging Market Inflation-Linked Bonds

Table 5. Mean-Variance Spanning for International Investors

Spanning Test
Regression Parameters (p-value)
Alpha Dev. Nom. Dev. Eq. Em. Nom. Em. Eq. Dev. ILB a = 0 X = 1 Both
Argentina 0.65 -2.3 7* 0.43* 2.75* -0.30* 1.28* 0.50 0.00 0.00
Brazil 1.24* -0.81* -0.27* 0.35* 0.51* 0.52* 0.00 0.00 0.00
Chile 0.24* 0.08 -0.15* 0.55* 0.16* -0.01 0.49 0.00 0.00
Colombia 0.50* 1.03* -0.01 0.78* 0.29* -1.20* 0.23 0.00 0.00
Mexico 0.10 -0.13 0.25* 0.41* 0.03 0.25* 0.74 0.00 0.00
S. Korea -0.24 0.32 0.22* 0.09 0.15* 0.77* 0.75 0.27 0.52
Poland 0.40* 1.02* 0.75* -0.76* 0.08 0.40* 0.32 0.00 0.00
S. Africa 0.43* 0.18 -0.04 0.20* 0.27* 0.23 0.33 0.14 0.23

Turkey 0.65* -0.13 -0.17* 1.27* 0.36* -0.10 0.29 0.00 0.01
EMGILB 0.73* -0.67* -0.10* 0.46* 0.38* 0.47* 0.00 0.00 0.00

EMGILB hedged 0.42* -0.21* -0.05* 0.44* 0.07* -0.06 0.00 0.00 0.00
Notes: This table reports the results from the mean-variance spanning regression:
REMLB = a + + hRDEVEQ + ^EMHOM + ^REMEQ + ^RDEVILB +
In addition to the parameter estimates, it also reports the p-values of three hypotheses. The first hypothesis is whether the intercept a
is zero, the second one is whether both s sum to 1, and the third is a joint test of the first two hypotheses, which is the mean-variance
spanning hypothesis.
*Significant at the 5% level.

Figure 6. Mean-Variance Frontier with Portfolio Weights,

January 2004-January 2011

Notes : The square on the solid line represents a portfolio with 81% emerging market inflation-linked
bonds, 17% developed market nominal bonds, and 2% emerging market equities. The circle on the solid
line represents a portfolio with 34% emerging market inflation-linked bonds and 66% emerging market
equities. The square on the dotted line represents a portfolio with 55% developed market nominal bonds,
35% emerging market nominal bonds, and 10% emerging market equities. The circle on the dotted line
represents a portfolio with 37% emerging market nominal bonds and 63% emerging market equities.

risk-return characteristics of investment portfolios. I tors in nominal bonds and equities should also allo-
also documented that inflation-linked bond returns cate a significant amount to inflation-linked bonds.
correlate more with realized inflation than do those Furthermore, my mean-variance spanning tests
of nominal bonds, even in the short run. Thus, inves- indicate that international investors who already

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Financial Analysts Journal

invest in emerging market nominal bonds and equi-

ties can benefit from adding emerging market
inflation-linked bonds to their investment portfolios.
I thank Marie Brire, Johan Duyvesteyn, Paul van Gent ,
Scott Harman, Jaap van der Hart , Anton Heese , Patrick
Houweling, Shuang Li , Ana Cristina Nio Gomez, and
Tom Steenkamp for valuable discussions and Vinzenz
Ziesemer for excellent research assistance. The views
expressed in this article are not necessarily shared by
Robeco or any of its subsidiaries.
This article qualifies for 1 CE credit.
Appendix A. Characteristics
of All Emerging Market Bonds
in the Sample
In my analyses, I used returns on indices based on
individual inflation-linked bonds. To enable a bet-
ter understanding of the construction of these
indices, I provide more detail on their constituents
in this appendix. Table Al presents an overview
of each of the individual bond issues included in
my analyses.

Table A1 . Characteristics of Each Bond Issue in the Sample

Maturity at
Country/ Coupon Coupon First Settle Maturity Issue Linked to EMTIL
Ticker Bond ISIN Ticker (%) Frequency Date Date (years) Index Inclusion
Argentina ARARGE035295 2 12 Feb/02 Jan/10 8 CER -
ARGBOC ARARGE03E931 2 2 Sep/04 Sep/14 10 CER -
ARGBON ARARGE035162 2 12 Feb/02 Jan/ 16 14 CER -
ARGENT ARBNAC030255 2 12 Feb/02 Feb/18 16 CER -
ARARGE03E121 2.79 2 Dec/03 Dec/33 30 CER -
ARARGE03E105 0.63 2 Nov/05 Dec/38 33 CER -

Brazil BRSTNCNTB062 6 2 Sep/03 Aug/06 3 IPCA -

BNTNB BRSTNCNTB0D0 6 2 Jun/05 May/07 2 IPCA -
BRSTNCNTB0L3 6 2 Sep/05 Aug/08 3 IPCA -
BRSTNCNTB070 6 2 Sep/03 May/09 6 IPCA Y
BRSTNCNTB0P4 6 2 Nov/06 Nov/09 3 IPCA -
BRSTNCNTB0M1 6 2 Jan/06 Aug/10 5 IPCA Y
BRSTNCNTB0N9 6 2 Mar/06 May/11 5 IPCA Y
BRSTNCNTB385 6 2 Jan/09 Nov/11 3 IPCA -
BRSTNCNTB2V8 6 2 May/07 Aug/12 5 IPCA Y
BRSTNCNTB2X4 6 2 Jan/08 May/13 5 IPCA -
BRSTNCNTB393 6 2 Jan/09 Aug/14 6 IPCA -
BRSTNCNTB088 6 2 0ct/03 May/15 12 IPCA Y
BRSTNCNTB2W6 6 2 May/07 May/17 10 IPCA Y
BRSTNCNTB3A0 6 2 Jan/09 Aug/20 12 IPCA -
BRSTNCNTB096 6 2 0ct/03 Aug/24 21 IPCA -
BRSTNCNTB007 6 2 Mar/06 May/35 29 IPCA -
BRSTNCNTB0A6 6 2 Sep/04 May/45 41 IPCA Y
BRSTNCNTB3D4 6 2 Feb/10 Aug/50 41 IPCA -

Chile CL0000000704 5 2 Sep/02 Sep/07 5 UF -

BCUCL CL0000000753 5 2 Mar/03 Mar/08 5 UF -
CL0000000613 5 2 Sep/03 Sep/08 5 UF -
CL0000000639 5 2 Sep/04 Sep/09 5 UF -
CL0000001488 5 2 Sep/05 Sep/10 5 UF -
CL0000001926 5 2 Sep/06 Sep/11 5 UF Y
CL00000050673 2 May/08 May/10 2 UF -
CL00000061493 2 Aug/08 Aug/10 2 UF -
CL00000022543 2 Apr/07 Apr/12 5 UF -
CL00000007125 2 Sep/02 Sep/12 10 UF -
CL0000002551 3 2 0ct/07 Oct/12 5 UF Y
(continued)

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 Emerging Market Inflation-Linked Bonds

Table A1. Characteristics of Each Bond Issue in the Sample (continued)

Maturity at
Country/ Coupon Coupon First Settle Maturity Issue Linked to EMTIL
Ticker Bond ISIN Ticker (%) Frequency Date Date (years) Index Inclusion
CL0000004003 3 2 Apr/08 Apr/ 13 5 F =
CL0000006065 3 2 Jul/08 Jul/13 5 UF Y
CL0000006214 3 2 0ct/08 Oct/13 5 UF Y
CL0000000621 5 2 Nov/03 Nov/13 10 UF -
CL0000006511 3 2 Apr/09 Apr/14 5 UF -
CL0001709782 3 2 Oct/lO Oct/15 5 UF -
CL0000001603 5 2 Jan/06 Jan/ 16 10 UF -
CL0000002312 3 2 May/07 May/17 10 UF -
CL0000002874 3 2 Jan/08 Jan/ 18 10 UF -
CL0000006073 3 2 Jul/08 Jul/ 18 10 UF -
CL0000006222 3 2 0ct/08 Oct/18 10 UF Y
CL0000000720 5 2 Sep/02 Sep/22 20 UF -
CL0000005075 3 2 May/08 May/28 20 UF -
Colombia 8 1 Jun/00 Jun/05 5 UVR -
COLTES 8 1 Sep/99 Sep/06 7 UVR -
6 1 Jan/00 Jan/07 7 UVR -
8 1 Sep/00 Jul/07 7 UVR -
8 1 Feb/01 Jan/08 7 UVR -
7 1 Sep/03 Sep/ 10 7 UVR -
8 1 Sep/01 Sep/11 10 UVR -
7 1 Jan/02 Jan/12 10 UVR -
7 1 May/02 May/12 10 UVR -
5.25 1 Jan/08 Mar/13 5 UVR -
7 1 Feb/03 Feb/15 12 UVR -
4.25 1 Apr/10 May/17 7 UVR -
4.25 1 Jan/07 Feb/23 16 UVR -

South Korea KR1035027T36 2.75 2 Mar/07 Mar/17 10 KOCPI Y

KTBI KR1035037061 2.75 2 Jun/10 Jun/20 10 KOCPI -

Mexico MXOSG0000049 3.25 2 0ct/07 Dec/10 3 UDI -

MUDI MXOSG0000080 3.25 2 Jan/09 Jun/12 3 UD Y
MXOSGOOOOOOO 5.5 2 Jan/03 Dec/12 10 UDI Y
MXOSG0000018 3.5 2 Jan/04 Dec/13 10 UDI -
MXOSG0000007 4.5 2 Jan/05 Dec/14 10 UDI -
MXOSG0000031 5 2 Jul/06 Jun/16 10 UDI Y
MXOSG0000056 3.5 2 Jan/08 Dec/17 10 UDI Y
MXOSG0000072 4 2 Jul/09 Jun/19 10 UDI Y
MXOSG0000015 4.5 2 Jan/06 Dec/25 20 UDI -
MXOSG0000023 4.5 2 Jan/06 Nov/35 30 UDI Y
MXOSG0000098 4 2 Mar/10 Nov/40 31 UDI -

Poland PL0000103529 3 1 Aug/04 Aug/ 16 12 POCPI Y

POLGB PL0000105359 2.75 1 Aug/08 Aug/23 15 POCPI -

South Africa ZAG000019357 3.8 2 May/02 Mar/08 6 SACPI -

SAGB ZAG000016551 6.25 2 Mar/00 Mar/13 13 SACPI Y
ZAG000077454 2.5 2 Jun/10 Jan/17 7 SACPI -
ZAG000077462 2.75 2 Jun/10 Jan/22 12 SACPI -
ZAG000018003 5.5 2 May/01 Dec/23 23 SACPI Y
ZAG000041849 2.6 2 Sep/07 Mar/28 21 SACPI -
ZAG000019944 3.45 2 Aug/03 Dec/33 30 SACPI Y
(continued)

September/October 2012 www.cfapubs.org 53

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Financial Analysts Journal

Table A1. Characteristics of Each Bond Issue in the Sample (continued)

Maturity at
Country/ Coupon Coupon First Settle Maturity Issue Linked to EMTIL
Ticker Bond ISIN Ticker (%) Frequency Date Date (years) Index Inclusion
Turkey TRT150212T15 10 2 Feb/07 Feb/12 5 TUCPI Y
TURKGB TRT140813T19 12 2 Aug/08 Aug/13 5 TUCPI Y
TRT210514T12 9 2 May/09 May/14 5 TUCPI Y
TRT011014T19 7 2 0ct/09 Oct/14 5 TUCPI -
TRT110215T16 4.5 2 Feb/10 Feb/15 5 TUCPI -
TRT290415T14 4 2 May/ 10 Apr/ 15 5 TUCPI -
TRT010420T19 4 2 Apr/10 Apr/20 10 TUCPI -

Appendix B. The Relationship over time. To enable a better understanding of the

between Issue Date and
Maturity
There is much dispersion in the maturities of the
inflation-linked bonds issued by governments of
emerging markets, both across governments and
relationship between the issue date and the
maturity at the issue date of each bond, I offer
detailed information in this appendix. Figure B1
provides a graphical representation of the rela-
tionship between several countries' bond issue
dates and maturities.

Figure B1. Bond Issue Date and Maturity by Country

Notes

1. See Bevilaqua and Garcia (2002) for arguments explaining
why increasing the issuance of inflation-linked bonds by
the Brazilian government makes sense. See Barnes, Bodie,
Triest, and Wang (2010) for a complete scorecard on the
goals and objectives of issuing inflation-linked bonds.
2. An exception is the HSBC Emerging Markets Inflation-
Linked Bond Fund, which was launched in June 2008
(US$44 million as of 31 December 2010) and invests only in
emerging market inflation-linked bonds.
3. The Barclays Capital indices do not cover some countries
that have issued inflation-linked bonds (e.g., Peru, Uruguay,
Iceland, and Kazakhstan), primarily because of the illiquid-
ity and small size of their inflation-linked bond markets.
4. For a detailed description of the requirements, see James
(2010).

54 www.cfapubs.org 2012 CFA Institute

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5. Arnott, Hsu, Li, and Shephard (2010) devised alternative
weighting schemes for emerging market bonds - for exam-
ple, using population, GDP, energy consumption, or the
square root of land area. Barclays Capital also offers indices
that constrain country weights.
6. For example, on 24 November 2010, the Wall Street Journal
reported that "Argentina's government, in an unexpected shift
toward economic pragmatism, said it was seeking technical
assistance from the International Monetary Fund to design a
new inflation index that could help restore credibility to official
statistics" (see Matt Moffett and Ken Parks, "Argentina Asks
IMF for Help on Data/' http://online.wsj.com/article/
SB10001424052748704369304575633133553824108.html). Also,
the Billion Prices Project (http:/ /bpp.mit.edu), launched by
Alberto Cavallo and Roberto Rigobon of the MIT Sloan School
of Management, has estimated substantially higher inflation
rates for Argentina than the official inflation rate reported by
the Argentine government.
7. I used the consumer price indices with Datastream code
XXI64...F, where XX refers to the Datastream two-letter
country code. Because this series is not available for Chile
until 2009, 1 used an alternative inflation series provided by
Instituto Nacional de Estadsticas (Datastream code
CLCONPRCF).
8. Other studies that have advocated the inclusion of inflation-
linked bonds in investment portfolios are Lucas and Quek
(1998), Lamm (1998), and Roll (2004).
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56 www.cfapubs.org 2012 CFA Institute

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