Inflation modelling for long-term liability driven investments

A regime-switching model allows a process to switch randomly between different regimes which have different parameter estimates. This study investigates the use of a two regime-switching model for inflation in South Africa as a means of determining a hedging strategy for inflation linked liabilities of a financial institution. Each regime is modeled using an autoregressive process with different parameters and the change in regimes is governed by a two state Markov chain. Once the parameters have been estimated, the predictive validity of the regime-switching process as a model for inflation in South Africa is tested and a hedging strategy is outlined for a set of inflation linked cash flows. The hedging strategy is to invest in inflation linked bonds, the number of which is determined through the use of a Rand-per-point methodology that is applied to the inflation linked cash flows and inflation linked bonds. Over the period from January 2008 to June 2013 this hedging strategy was shown to be profitable.

Grantor dc:publisher.institution

Division of Actuarial Science

Year dc:date.issued

2014

Author dc:creator

• De Kock, Justin

Advisors dc:contributor.advisor

• Mollentz, Greg
• McWalter, Tom

Language dc:language.iso

eng

Handle dc:identifier.uri

http://hdl.handle.net/11427/18602

OAI identifier oai:identifier

oai:open.uct.ac.za:11427/18602