Inflation and Duration Tail Risk Hedging

In the aftermath of the 2008 crisis, the term tail risk hedging has entered the vernacular of financial market participants with a speed and intensity unmatched by any other market concept in recent memory. However, this concept so far has largely been limited to the hedging of risks related to rapid declines in equity-related markets. Policy makers are well aware of these equity-market-related risks, which from a macro perspective are associated with a deflationary fat tail and have flooded the markets with unprecedented amounts of liquidity via low interest rates, an increasing quantity of money, and outright asset purchases. These extreme measures, by most metrics, have resulted in a historically ...

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