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Stochastic Interest Rates and the Bond-Stock Mix

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  • Michael J. Brennan
  • Yihong Xia

Abstract

The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997).It is shown that the apparent inconsistency is largely explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks. The analysis points to the importance of considering investors' time horizons in analyzing optimal portfolio policies.

Suggested Citation

  • Michael J. Brennan & Yihong Xia, 2000. "Stochastic Interest Rates and the Bond-Stock Mix," Review of Finance, European Finance Association, vol. 4(2), pages 197-210.
  • Handle: RePEc:oup:revfin:v:4:y:2000:i:2:p:197-210.
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    File URL: http://hdl.handle.net/10.1023/A:1009890514371
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