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A Multivariate Model of Strategic Asset Allocation

  • Chan, Yeung Lewis
  • Viceira, Luis
  • Campbell, John

We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely long-lived investor with Epstein–Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and post-war quarterly U.S. data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. Long-term inflation-indexed bonds greatly increase the utility of conservative investors.

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File URL: http://dash.harvard.edu/bitstream/handle/1/3163263/campbellnber_assetallocation.pdf
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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3163263.

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Date of creation: 2003
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Publication status: Published in Journal of Financial Economics
Handle: RePEc:hrv:faseco:3163263
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