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An Econometric Model of the Yield Curve With Macroeconomic Jump Effects

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  • Piazzesi, Monika
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    Abstract

    We present a simulation-based method for solving realistic portfolio choice problems that potentially involve non-standard preferences and a large number of assets with arbitrary return distribution. Specifically, the return distribution can be time-varying as a function of many observable or unobservable state variables and can even be path-dependent. Furthermore, the method is flexible enough to accommodate intermediate consumption, parameter and model uncertainty, and portfolio constraints. We first establish the properties of the method for the choice between a stock index and cash when the stock returns are either iid or predictable by the dividend yield. We then explore the optimal asset allocation across ten industry portfolios that exhibit momentum through its empirical pattern of own- and cross-serial correlations of returns.

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    File URL: http://www.escholarship.org/uc/item/5946p7hn.pdf;origin=repeccitec
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    Bibliographic Info

    Paper provided by Anderson Graduate School of Management, UCLA in its series University of California at Los Angeles, Anderson Graduate School of Management with number qt5946p7hn.

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    Date of creation: 10 Apr 2001
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    Handle: RePEc:cdl:anderf:qt5946p7hn

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