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Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence

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  • Rapach, David E.
  • Wohar, Mark E.

Abstract

We investigate the intertemporal hedging demands for stocks and bonds for investors in the U.S., Australia, Canada, France, Germany, Italy, and U.K. Using the methodology of Campbell etal. [Campbell, J.Y., Chan, Y.L., Viceira, L.M., 2003a. A multivariate model of strategic asset allocation. Journal of Financial Economics 67(1), 41-81], we solve a multi-period portfolio choice problem for an investor in each country with an infinite horizon and Epstein-Zin-Weil utility, where the dynamics governing asset returns are described by a vector autoregressive process. We find sizable mean intertemporal hedging demands for domestic stocks in the U.S. and U.K. and considerably smaller mean hedging demands for domestic stocks in the other countries. An investor in the U.S. who has access to foreign stocks and bonds displays small mean intertemporal hedging demands for foreign stocks and bonds, while investors in Australia, Canada, France, Germany, Italy, and the U.K. who have access to U.S. stocks and bonds all exhibit sizable mean hedging demands for U.S. stocks.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 28 (2009)
Issue (Month): 3 (April)
Pages: 427-453

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Handle: RePEc:eee:jimfin:v:28:y:2009:i:3:p:427-453

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Web page: http://www.elsevier.com/locate/inca/30443

Related research

Keywords: Intertemporal hedging demand Multi-period portfolio choice problem Parametric bootstrap Return predictability;

References

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Cited by:
  1. Tom Engsted & Thomas Q. Pedersen, 2008. "Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model," CREATES Research Papers 2008-27, School of Economics and Management, University of Aarhus.
  2. Bruno, Salvatore & Chincarini, Ludwig, 2010. "A historical examination of optimal real return portfolios for non-US investors," Review of Financial Economics, Elsevier, vol. 19(4), pages 161-178, October.

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