Strategic Asset Allocation and Consumption Decisions under Multivariate Regime Switching
AbstractThis paper studies optimal asset allocation to stocks, long-term bonds and T-bills and consumption choice in the presence of regime switching in asset returns. Optimal asset allocations vary considerably across four states - both across bonds and stocks and among large and small stocks - and change significantly over time as investors revise their estimates of the current state probabilities. In the crash state investors always allocate more of their portfolio to stocks the longer their investment horizon, while the optimal allocation to stocks declines as a function of the investment horizon in bull markets. Consumption-to-wealth ratios are also found to depend on the underlying state. Welfare costs from ignoring regime switching are substantial, especially when frequent rebalancing is considered. Results are found to be robust to changes in risk aversion, the imposition of short sale restrictions, the inclusion of standard predictor variables such as the dividend yield and to parameter uncertainty
Download InfoTo our knowledge, this item is not available for download. To find whether it is available, there are three options:
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
Bibliographic InfoPaper provided by Econometric Society in its series Econometric Society 2004 Australasian Meetings with number 349.
Date of creation: 11 Aug 2004
Date of revision:
Contact details of provider:
Phone: 1 212 998 3820
Fax: 1 212 995 4487
Web page: http://www.econometricsociety.org/pastmeetings.asp
More information through EDIRC
asset allocation; regime switching; risk aversion;
Find related papers by JEL classification:
- A - General Economics and Teaching
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Meenagh, David & Minford, Patrick & Peel, David, 2006.
"Simulating Stock Returns under switching regimes - a new test of market efficiency,"
Cardiff Economics Working Papers
E2006/13, Cardiff University, Cardiff Business School, Economics Section.
- Meenagh, David & Minford, Patrick & Peel, David, 2007. "Simulating stock returns under switching regimes - A new test of market efficiency," Economics Letters, Elsevier, vol. 94(2), pages 235-239, February.
- Meenagh, David & Minford, Patrick & Peel, David, 2006. "Simulating Stock Returns Under Switching Regimes - A New Test of Market Efficiency," CEPR Discussion Papers 5614, C.E.P.R. Discussion Papers.
- Gabriel Vasco J. & Alexandre Fernando & Bação Pedro, 2008.
"The Consumption-Wealth Ratio under Asymmetric Adjustment,"
Studies in Nonlinear Dynamics & Econometrics,
De Gruyter, vol. 12(4), pages 1-32, December.
- Vasco Gabriel & Fernando Alexandre & Pedro Bação, 2007. "The Consumption-Wealth Ratio Under Asymmetric Adjustment," GEMF Working Papers 2007-06, GEMF - Faculdade de Economia, Universidade de Coimbra.
- Fernando Alexandre & Vasco J. Gabriel & Pedro Bação, 2007. "The Consumption-Wealth Ratio Under Asymmetric Adjustment," NIPE Working Papers 15/2007, NIPE - Universidade do Minho.
- Bernd Scherer, 2009. "A note on portfolio choice for sovereign wealth funds," Financial Markets and Portfolio Management, Springer, vol. 23(3), pages 315-327, September.
- Mark E. Wohar & David E. Rapach, 2005. "Return Predictability and the Implied Intertemporal Hedging Demands for Stocks and Bonds: International Evidence," Computing in Economics and Finance 2005 329, Society for Computational Economics.
- Marie Brière & Ombretta Signori, 2011.
"Inflation hedging portfolios in different regimes,"
BIS Papers chapters,
in: Bank for International Settlements (ed.), Portfolio and risk management for central banks and sovereign wealth funds, volume 58, pages 139-163
Bank for International Settlements.
- Asger Lunde & Allan Timmermann, 2005. "Completion time structures of stock price movements," Annals of Finance, Springer, vol. 1(3), pages 293-326, 08.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum).
If references are entirely missing, you can add them using this form.