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Strategic Asset Allocation in a Continuous-Time VAR Model

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Author Info
John Y. Campbell
George Chacko
Jorge Rodriguez
Luis M. Viciera

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Abstract

This note derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1)process, while the riskless interest rate is constant. The note also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is numerically close to that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9547.

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Date of creation: Mar 2003
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Handle: RePEc:nbr:nberwo:9547

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G12 - Financial Economics - - General Financial Markets - - - Asset Pricing

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Campbell, John Y. & Chan, Yeung Lewis & Viceira, Luis M., 2003. "A multivariate model of strategic asset allocation," Journal of Financial Economics, Elsevier, vol. 67(1), pages 41-80, January. [Downloadable!] (restricted)
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  2. John Y. Campbell & Luis M. Viceira, 1999. "Consumption And Portfolio Decisions When Expected Returns Are Time Varying," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 433-495, May. [Downloadable!] (restricted)
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  3. Duffie, Darrell & Epstein, Larry G, 1992. "Asset Pricing with Stochastic Differential Utility," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 5(3), pages 411-36. [Downloadable!] (restricted)
  4. John Y. Campbell & Luis M. Viceira, 1998. "Who Should Buy Long-Term Bonds?," NBER Working Papers 6801, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Bergstrom, A.R., 1984. "Continuous time stochastic models and issues of aggregation over time," Handbook of Econometrics, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 2, chapter 20, pages 1145-1212 Elsevier. [Downloadable!] (restricted)
  6. 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. [Downloadable!] (restricted)
  7. Campbell, J.Y. & Kyle, A.S., 1988. "Smart Money, Noise Trading And Stock Price Behavior," Papers 95, Princeton, Department of Economics - Financial Research Center.
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  8. George CHACKO & Luis M. VICEIRA, 1999. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," FAME Research Paper Series rp11, International Center for Financial Asset Management and Engineering. [Downloadable!]
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  9. Kim, Tong Suk & Omberg, Edward, 1996. "Dynamic Nonmyopic Portfolio Behavior," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 9(1), pages 141-61. [Downloadable!] (restricted)
  10. Duffie, Darrell & Epstein, Larry G, 1992. "Stochastic Differential Utility," Econometrica, Econometric Society, vol. 60(2), pages 353-94, March. [Downloadable!] (restricted)
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Eduardo Walker, 2006. "Optimal Portfolios In Defined Contribution Pension Systems," Abante, Escuela de Administracion. Pontificia Universidad Católica de Chile., vol. 9(2), pages 99-129. [Downloadable!]
  2. Jurek, Jakub W & Viceira, Luis M, 2006. "Optimal Value and Growth Tilts in Long-Horizon Portfolios," CEPR Discussion Papers 5773, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  3. Sørensen, Carsten & Trolle, Anders Bjerre, 2006. "Dynamic asset allocation and latent variables," Working Papers 2004-8, Copenhagen Business School, Department of Finance. [Downloadable!]
  4. 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. [Downloadable!] (restricted)
  5. Ferstl, Robert & Weissensteiner, Alex, 2009. "Asset-Liability Management under time-varying Investment Opportunities," MPRA Paper 15068, University Library of Munich, Germany, revised 25 May 2009. [Downloadable!]
  6. Luca Benzoni & Pierre Collin-Dufresne & Robert S. Goldstein, 2005. "Portfolio Choice over the Life-Cycle in the Presence of 'Trickle Down' Labor Income," NBER Working Papers 11247, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  7. Alois Geyer & Michael Hanke & Alex Weissensteiner, 2009. "A stochastic programming approach for multi-period portfolio optimization," Computational Management Science, Springer, vol. 6(2), pages 187-208, May. [Downloadable!] (restricted)
  8. Jaime A. Londo\~no, 2006. "State Dependent Utility," Quantitative Finance Papers math/0603316, arXiv.org. [Downloadable!]
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