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An Empirical Analysis of U.S. Aggregate Portfolio Allocations

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  • Michel Normandin

    ()
    (IEA, HEC Montréal)

  • Pascal Saint-Amour

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.

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File URL: http://www.hec.ca/iea/cahiers/2005/iea0502_mn.pdf
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Bibliographic Info

Paper provided by HEC Montréal, Institut d'économie appliquée in its series Cahiers de recherche with number 05-02.

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Length: 33 pages
Date of creation: Mar 2005
Date of revision:
Handle: RePEc:iea:carech:0502

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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
Phone: (514) 340-6463
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Postal: Institut d'économie appliquée HEC Montréal 3000, Chemin de la Côte-Sainte-Catherine Montréal, Québec H3T 2A7
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Related research

Keywords: Dynamic Hedging; Risk Aversion; Inter-temporal Substitution; Time-Varying Investment Opportunity Set.;

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References

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  1. Mehra, Rajnish & Prescott, Edward C., 1985. "The equity premium: A puzzle," Journal of Monetary Economics, Elsevier, vol. 15(2), pages 145-161, March.
  2. 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.
  3. Wayne E. Ferson & Campbell R. Harvey, 1999. "Conditioning Variables and the Cross-Section of Stock Returns," NBER Working Papers 7009, National Bureau of Economic Research, Inc.
  4. 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.
  5. Weil, Philippe, 1990. "Nonexpected Utility in Macroeconomics," The Quarterly Journal of Economics, MIT Press, vol. 105(1), pages 29-42, February.
  6. John Y. Campbell & Yeung Lewis Chan & Luis M. Viceira, 2001. "A Multivariate Model of Strategic Asset Allocation," NBER Working Papers 8566, National Bureau of Economic Research, Inc.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. 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.
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Cited by:
  1. Ivan Jaccard, 2006. "Strategic Asset Allocation, Asset Price Dynamics, and the Business Cycle," 2006 Meeting Papers 574, Society for Economic Dynamics.
  2. Didier, Tatiana & Lowenkron, Alexandre, 2009. "The current account as a dynamic portfolio choice problem," Policy Research Working Paper Series 4861, The World Bank.

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