Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor
AbstractThis paper solves numerically the intertemporal consumption and portfolio choice problem of an infinitely-lived investor who faces a time-varying equity premium. The solutions we obtain are very similar to the approximate analytical solutions of Campbell and Viceira (1999), except at the upper extreme of the state space where both the numerical consumption and portfolio rules flatten out. We also consider a contrained version of the problem in which the investor faces borrowing and short-sales contraints. These constraints bind when the equity premium moves away from its mean in either direction, and are particularly severe for risk-tolerant investors. The optimal constrained portfolio rules are similar but not idenitcal to the optimal unconstrained rules with the constraints imposed. The portfolio constraints also affect the optimal consumption policy.
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Bibliographic InfoPaper provided by Harvard - Institute of Economic Research in its series Harvard Institute of Economic Research Working Papers with number 1899.
Date of creation: 2000
Date of revision:
Other versions of this item:
- Cocco, Joao & Gomes, Francisco & Maenhout, Pascal J. & Campbell, John Y. & Viceira, Luis Manuel, 2001. "Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor," Scholarly Articles 3353758, Harvard University Department of Economics.
- John Y. Campbell & Joao Cocco & Francisco Gomes & Pascal Maenhout & Luis M. Viceira, 1999. "Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor," Computing in Economics and Finance 1999 1344, Society for Computational Economics.
- NEP-ALL-2000-12-15 (All new papers)
- NEP-FIN-2000-11-29 (Finance)
- NEP-FMK-2000-11-29 (Financial Markets)
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