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Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model

Listed author(s):
  • Engsted, Tom
  • Pedersen, Thomas Q.

Within a VAR based intertemporal asset allocation model we explore the effects on return predictability and optimal asset allocation of adjusting VAR parameter estimates for small-sample bias. We apply a simple and easy-to-use analytical bias formula instead of bootstrap or Monte Carlo bias-adjustment. Regarding return predictability we show that bias-adjustment in the multivariate setup can yield very different results than in the univariate case. Furthermore, bias-correcting the VAR parameters has both quantitatively and qualitatively important effects on the optimal portfolio choice. For intermediate values of risk-aversion, the intertemporal hedging demand for bonds and stocks is heavily affected by the bias-correction. Utility calculations also show large effects of bias-adjustment, both in-sample and out-of-sample.

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File URL: http://www.sciencedirect.com/science/article/pii/S0927539812000047
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Article provided by Elsevier in its journal Journal of Empirical Finance.

Volume (Year): 19 (2012)
Issue (Month): 2 ()
Pages: 241-253

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Handle: RePEc:eee:empfin:v:19:y:2012:i:2:p:241-253
DOI: 10.1016/j.jempfin.2012.01.003
Contact details of provider: Web page: http://www.elsevier.com/locate/jempfin

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