Discussion paper

DP4160 Strategic Asset Allocation in a Continuous Time VAR Model

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.

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Citation

Campbell, J, L Viceira, J Rodriguez and G Chacko (eds) (2003), “DP4160 Strategic Asset Allocation in a Continuous Time VAR Model”, CEPR Press Discussion Paper No. 4160. https://cepr.org/publications/dp4160