Discussion Paper Details

Please find the details for DP3070 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: A Multivariate Model of Strategic Asset Allocation

Author(s): John Y Campbell, Yeung Lewis Chan and Luis M Viceira

Publication Date: November 2001

Keyword(s): intertemporal hedging demand, portfolio choice, predictability and strategic asset allocation

Programme Area(s): Financial Economics

Abstract: Much recent work has documented evidence for the predictability of asset returns. We show how such predictability can affect the portfolio choices of long-lived investors who value wealth not for its own sake but for the consumption their wealth can support. We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely-lived investor with Epstein-Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and postwar quarterly US data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. We extend the analysis to consider long-term inflation-indexed bonds and find that these bonds greatly increase the utility of conservative investors, who should hold large positions when they are available.

For full details and related downloads, please visit:

Bibliographic Reference

Campbell, J, Chan, Y and Viceira, L. 2001. 'A Multivariate Model of Strategic Asset Allocation'. London, Centre for Economic Policy Research.