Optimal Value and Growth Tilts in Long-Horizon Portfolios
Abstract
We develop an analytical solution to the dynamic portfolio choice problem of an investor with power utility defined over wealth at a finite horizon, who faces a time-varying investment opportunity set, parameterized using a flexible vector autoregression. We apply this framework to study the horizon effects in the allocations of equity-only investors, who hold a mix of value and growth indices, and a more general investor, who also has access to Treasury bills and bonds. We find that the mean allocation of equity-only investors is heavily tilted towards value stocks at short-horizons, but the magnitude of this tilt declines dramatically with the investment horizon, implying that growth is less risky than value at long horizons. Investors with access to bills and bonds exhibit similar behavior, when value and growth tilts are computed relative to the total equity allocation of the portfolio. However, after accounting for the propensity of these investors to increase their total equity allocation as the horizon increases, the mean value tilt of the optimal allocation is shown to be positive and stable across time. Copyright 2011, Oxford University Press.(This abstract was borrowed from another version of this item.)
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Bibliographic Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5773.Length:
Date of creation: Jul 2006
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Handle: RePEc:cpr:ceprdp:5773
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Related research
Keywords: growth investing; intertemporal hedging; portfolio choice; risk and value;Other versions of this item:
- Jakub W. Jurek & Luis M. Viceira, 2011. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," Review of Finance, European Finance Association, vol. 15(1), pages 29-74.
- Jakub W. Jurek & Luis M. Viceira, 2006. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," NBER Working Papers 12017, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing
This paper has been announced in the following NEP Reports:
- NEP-ALL-2006-10-28 (All new papers)
- NEP-CFN-2006-10-28 (Corporate Finance)
- NEP-FIN-2006-10-28 (Finance)
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Citations
Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.Cited by:
- Douglas W. Blackburn & William N. Goetzmann & Andrey D. Ukhov, 2009. "Risk Aversion and Clientele Effects," NBER Working Papers 15333, National Bureau of Economic Research, Inc.
- Schotman, Peter & Tschernig, Rolf & Budek, Jan, 2008.
"Long Memory and the Term Structure of Risk,"
University of Regensburg Working Papers in Business, Economics and Management Information Systems
427, University of Regensburg, Department of Economics.
- Peter C. Schotman & Rolf Tschernig & Jan Budek, 2008. "Long Memory and the Term Structure of Risk," Journal of Financial Econometrics, Society for Financial Econometrics, vol. 6(4), pages 459-495, Fall.
- Schotman, Peter C. & Tschernig, Rolf & Budek, Jan, 2008. "Long memory and the term structure of risk," Open Access publications from Maastricht University urn:nbn:nl:ui:27-23095, Maastricht University.
- Jules H. van Binsbergen & Michael W. Brandt & Ralph S.J. Koijen, 2006. "Optimal Decentralized Investment Management," NBER Working Papers 12144, National Bureau of Economic Research, Inc.
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