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Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence

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  • Rapach, David E.
  • Wohar, Mark E.

Abstract

We investigate the intertemporal hedging demands for stocks and bonds for investors in the U.S., Australia, Canada, France, Germany, Italy, and U.K. Using the methodology of Campbell etal. [Campbell, J.Y., Chan, Y.L., Viceira, L.M., 2003a. A multivariate model of strategic asset allocation. Journal of Financial Economics 67(1), 41-81], we solve a multi-period portfolio choice problem for an investor in each country with an infinite horizon and Epstein-Zin-Weil utility, where the dynamics governing asset returns are described by a vector autoregressive process. We find sizable mean intertemporal hedging demands for domestic stocks in the U.S. and U.K. and considerably smaller mean hedging demands for domestic stocks in the other countries. An investor in the U.S. who has access to foreign stocks and bonds displays small mean intertemporal hedging demands for foreign stocks and bonds, while investors in Australia, Canada, France, Germany, Italy, and the U.K. who have access to U.S. stocks and bonds all exhibit sizable mean hedging demands for U.S. stocks.

Suggested Citation

  • Rapach, David E. & Wohar, Mark E., 2009. "Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence," Journal of International Money and Finance, Elsevier, vol. 28(3), pages 427-453, April.
  • Handle: RePEc:eee:jimfin:v:28:y:2009:i:3:p:427-453
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    References listed on IDEAS

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    Cited by:

    1. Jordan, Steven J. & Vivian, Andrew & Wohar, Mark E., 2017. "Forecasting market returns: bagging or combining?," International Journal of Forecasting, Elsevier, vol. 33(1), pages 102-120.
    2. Jordan, Steven J. & Vivian, Andrew & Wohar, Mark E., 2016. "Can commodity returns forecast Canadian sector stock returns?," International Review of Economics & Finance, Elsevier, vol. 41(C), pages 172-188.
    3. Engsted, Tom & Pedersen, Thomas Q., 2012. "Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model," Journal of Empirical Finance, Elsevier, vol. 19(2), pages 241-253.
    4. Bruno, Salvatore & Chincarini, Ludwig, 2010. "A historical examination of optimal real return portfolios for non-US investors," Review of Financial Economics, Elsevier, vol. 19(4), pages 161-178, October.
    5. Rocha Armada, Manuel J. & Sousa, Ricardo M. & Wohar, Mark E., 2015. "Consumption growth, preference for smoothing, changes in expectations and risk premium," The Quarterly Review of Economics and Finance, Elsevier, vol. 56(C), pages 80-97.

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