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An Empirical Analysis of U.S. Aggregate Portfolio Allocations

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  • Michel Normandin
  • Pascal St-Amour

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Abstract

This paper analyzes the important time variation in U.S. aggregate portfolio allocations. To do so, we first use flexible descriptions of preferences and investment opportunities to derive optimal decision rules that nest tactical, myopic, and strategic portfolio allocations. We then compare these rules to the data through formal statistical analysis. Our main results reveal that i) purely tactical and myopic investment behaviors are unambiguously rejected, ii) strategic portfolio allocations are strongly supported, and iii) the Fama-French factors best explain empirical portfolio shares. Ce papier analyse la forte variation chronologique dans les portefeuilles agrégés américains. À cet effet, nous utilisons des descriptions flexibles des préférences et des opportunités d'investissement afin de dériver les allocations tactiques, myopes et stratégiques. Ces règles sont ensuite comparées aux données dans le cadre d'une analyse statistique formelle. Nos principaux résultats révèlent que i) les règles purement myopes ou tactiques sont rejetées, ii) les portefeuilles stratégiques sont supportés et iii) les facteurs Fama-French sont ceux qui reproduisent le mieux les allocations empiriques.

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Bibliographic Info

Paper provided by CIRANO in its series CIRANO Working Papers with number 2005s-07.

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Date of creation: 01 Mar 2005
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Handle: RePEc:cir:cirwor:2005s-07

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Keywords: factorial models of returns; myopic and strategic; non-expected utility; tactical portfolio allocations ; modèles factoriels des rendements; myopes et stratégiques; portefeuilles tactiques; utilité non espérée;

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  1. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 54(4), pages 1325-1360, 08.
  2. Michel Normandin & Pascal St-Amour, 2002. "Canadian consumption and portfolio shares," Canadian Journal of Economics, Canadian Economics Association, vol. 35(4), pages 737-756, November.
  3. John Y. Campbell & Luis M. Viceira, 1998. "Consumption and Portfolio Decisions When Expected Returns Are Time Varying," Harvard Institute of Economic Research Working Papers 1835, Harvard - Institute of Economic Research.
  4. Campbell, John Y & Chan, Yeung Lewis & Viceira, Luis M, 2001. "A Multivariate Model of Strategic Asset Allocation," CEPR Discussion Papers 3070, C.E.P.R. Discussion Papers.
  5. Campbell, John Y. & Koo, Hyeng Keun, 1997. "A comparison of numerical and analytic approximate solutions to an intertemporal consumption choice problem," Journal of Economic Dynamics and Control, Elsevier, vol. 21(2-3), pages 273-295.
  6. Chen, Nai-Fu & Roll, Richard & Ross, Stephen A, 1986. "Economic Forces and the Stock Market," The Journal of Business, University of Chicago Press, vol. 59(3), pages 383-403, July.
  7. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
  8. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  9. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
  10. Alberto Giovannini & Philippe Weil, 1989. "Risk Aversion and Intertemporal Substitution in the Capital Asset Pricing Model," NBER Working Papers 2824, National Bureau of Economic Research, Inc.
  11. Epstein, Larry G & Zin, Stanley E, 1989. "Substitution, Risk Aversion, and the Temporal Behavior of Consumption and Asset Returns: A Theoretical Framework," Econometrica, Econometric Society, vol. 57(4), pages 937-69, July.
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Cited by:
  1. Didier, Tatiana & Lowenkron, Alexandre, 2009. "The current account as a dynamic portfolio choice problem," Policy Research Working Paper Series 4861, The World Bank.
  2. Ivan Jaccard, 2007. "Strategic Asset Allocation, Asset Price Dynamics, and the Business Cycle," Swiss Finance Institute Research Paper Series 07-19, Swiss Finance Institute.

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