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Serial Correlation of Asset Returns and Optimal Portfolios for the Long and Short Term


  • Stanley Fischer
  • George Pennacchi


Optimal portfolios differ according to the length of time they are held without being rebalanced. For the case in which asset returns are identically and independently distributed, it has been shown that optimal portfolios become less diversified as the holding period lengthens.We show that the anti-diversification result does not obtain when asset returns are serially correlated, and examine properties of asymptotic portfolios for the case where the short term interest rate, although known at each moment of time, may change unpredictably over time. The theoretical results provide no presumption about the effects of the length of the holding period on the optimal portfolio. Using estimated processes for stock and bill returns, we show that calculated optimal portfolios are virtually invariant to the length of the holding period. The estimated processes for asset returns also imply very little difference between portfolios calculated ignoring changes in the investment opportunity set and those obtained when the investment opportunity set changes over time.

Suggested Citation

  • Stanley Fischer & George Pennacchi, 1985. "Serial Correlation of Asset Returns and Optimal Portfolios for the Long and Short Term," NBER Working Papers 1625, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:1625
    Note: ME

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    References listed on IDEAS

    1. Stanley Fischer, 1983. "Investing for the Short and the Long Term," NBER Chapters,in: Financial Aspects of the United States Pension System, pages 153-176 National Bureau of Economic Research, Inc.
    2. Klein, Benjamin, 1976. "The social costs of the recent inflation: The mirage of steady "anticipated" inflation," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 3(1), pages 185-212, January.
    3. Merton, Robert C, 1973. "An Intertemporal Capital Asset Pricing Model," Econometrica, Econometric Society, vol. 41(5), pages 867-887, September.
    4. Vasicek, Oldrich, 1977. "An equilibrium characterization of the term structure," Journal of Financial Economics, Elsevier, vol. 5(2), pages 177-188, November.
    5. Zvi Bodie & John B. Shoven, 1983. "Financial Aspects of the United States Pension System," NBER Books, National Bureau of Economic Research, Inc, number bodi83-1, January.
    6. Garbade, Kenneth & Wachtel, Paul, 1978. "Time variation in the relationship between inflation and interest rates," Journal of Monetary Economics, Elsevier, vol. 4(4), pages 755-765, November.
    7. Fama, Eugene F. & Gibbons, Michael R., 1982. "Inflation, real returns and capital investment," Journal of Monetary Economics, Elsevier, vol. 9(3), pages 297-323.
    8. Goldman, M Barry, 1979. "Anti-Diversification or Optimal Programmes for Infrequently Revised Portfolios," Journal of Finance, American Finance Association, vol. 34(2), pages 505-516, May.
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    Cited by:

    1. Mitchell, Douglas W., 2001. "Effects of decision interval on optimal intertemporal portfolios with serially correlated returns," The Quarterly Review of Economics and Finance, Elsevier, vol. 41(3), pages 427-438.

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