DP4160 Strategic Asset Allocation in a Continuous Time VAR Model

Author(s): John Y Campbell, George Chacko, Jorge Rodriguez, Luis M Viceira
Publication Date: December 2003
Keyword(s): intertemporal hedging, long-term investing, portfolio choice, recursive utility, time aggregation
JEL(s): G12
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=4160

This Paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The Paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.