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Asset Allocation

  • Jessica Wachter

This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond--stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior beliefs and specifications of the likelihood are explored. In the dynamic setting, recursive utility is assumed, and attention is paid to obtaining analytical results when possible. Results under both full and limited-information assumptions are discussed.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16255.

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Date of creation: Aug 2010
Date of revision:
Publication status: published as Jessica A. Wachter, 2010. "Asset Allocation," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 175-206, December.
Handle: RePEc:nbr:nberwo:16255
Note: AP
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  1. Wachter, Jessica A., 2002. "Portfolio and Consumption Decisions under Mean-Reverting Returns: An Exact Solution for Complete Markets," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 37(01), pages 63-91, March.
  2. Michael W. Brandt & Amit Goyal & Pedro Santa-Clara & Jonathan R. Stroud, 2005. "A Simulation Approach to Dynamic Portfolio Choice with an Application to Learning About Return Predictability," Review of Financial Studies, Society for Financial Studies, vol. 18(3), pages 831-873.
  3. John Y. Campbell & Motohiro Yogo, 2002. "Efficient Tests of Stock Return Predictability," Harvard Institute of Economic Research Working Papers 1972, Harvard - Institute of Economic Research.
  4. Jacob Boudoukh & Roni Michaely & Matthew Richardson & Michael R. Roberts, 2007. "On the Importance of Measuring Payout Yield: Implications for Empirical Asset Pricing," Journal of Finance, American Finance Association, vol. 62(2), pages 877-915, 04.
  5. Kandel, Shmuel & Stambaugh, Robert F, 1996. " On the Predictability of Stock Returns: An Asset-Allocation Perspective," Journal of Finance, American Finance Association, vol. 51(2), pages 385-424, June.
  6. Campbell, John Y & Chacko, George & Rodriguez, Jorge & Viceira, Luis M, 2003. "Strategic Asset Allocation in a Continuous Time VAR Model," CEPR Discussion Papers 4160, C.E.P.R. Discussion Papers.
  7. Dybvig, Philip H & Rogers, L C G & Back, Kerry, 1999. "Portfolio Turnpikes," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 165-95.
  8. John Y. Campbell & Luis M. Viceira, 1996. "Consumption and Portfolio Decisions When Expected Returns are Time Varying," NBER Working Papers 5857, National Bureau of Economic Research, Inc.
  9. Hui Chen & Nengjiu Ju & Jianjun Miao, 2014. "Dynamic Asset Allocation with Ambiguous Return Predictability," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 17(4), pages 799-823, October.
  10. Goetzmann, William Nelson & Jorion, Philippe, 1993. " Testing the Predictive Power of Dividend Yields," Journal of Finance, American Finance Association, vol. 48(2), pages 663-79, June.
  11. Pástor, Luboš & Veronesi, Pietro, 2009. "Learning in Financial Markets," CEPR Discussion Papers 7127, C.E.P.R. Discussion Papers.
  12. Amit Goval & Ivo Welch, 2004. "A Comprehensive Look at the Empirical Performance of Equity Premium Prediction," NBER Working Papers 10483, National Bureau of Economic Research, Inc.
  13. Ľuboš Pástor & Robert F. Stambaugh, 2012. "Are Stocks Really Less Volatile in the Long Run?," Journal of Finance, American Finance Association, vol. 67(2), pages 431-478, 04.
  14. Pástor, Luboš & Stambaugh, Robert F., 2007. "Predictive Systems: Living with Imperfect Predictors," CEPR Discussion Papers 6076, C.E.P.R. Discussion Papers.
  15. Jessica A. Wachter & Missaka Warusawitharana, 2007. "Predictable Returns and Asset Allocation: Should a Skeptical Investor Time the Market?," NBER Working Papers 13165, National Bureau of Economic Research, Inc.
  16. Jessica A. Wachter & Missaka Warusawitharana, 2011. "What is the Chance that the Equity Premium Varies over Time? Evidence from Regressions on the Dividend-Price Ratio," NBER Working Papers 17334, National Bureau of Economic Research, Inc.
  17. Chacko, George & Viceira, Luis M, 2005. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," CEPR Discussion Papers 4913, C.E.P.R. Discussion Papers.
  18. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December.
  19. Jessica Wachter, 2008. "Can time-varying risk of rare disasters explain aggregate stock market volatility?," 2008 Meeting Papers 944, Society for Economic Dynamics.
  20. Missaka Warusawitharana & Jessica A. Wachter, 2009. "What is the chance that the equity premium varies over time? evidence from predictive regressions," Finance and Economics Discussion Series 2009-26, Board of Governors of the Federal Reserve System (U.S.).
  21. Balduzzi, Pierluigi & Lynch, Anthony W., 1999. "Transaction costs and predictability: some utility cost calculations," Journal of Financial Economics, Elsevier, vol. 52(1), pages 47-78, April.
  22. Uhlig, Harald, 1994. "On Jeffreys Prior when Using the Exact Likelihood Function," Econometric Theory, Cambridge University Press, vol. 10(3-4), pages 633-644, August.
  23. Bossaerts, Peter & Hillion, Pierre, 1999. "Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?," Review of Financial Studies, Society for Financial Studies, vol. 12(2), pages 405-28.
  24. Doron Avramov & Guofu Zhou, 2010. "Bayesian Portfolio Analysis," Annual Review of Financial Economics, Annual Reviews, vol. 2(1), pages 25-47, December.
  25. Andrew Ang & Geert Bekaert, 2001. "Stock Return Predictability: Is it There?," NBER Working Papers 8207, National Bureau of Economic Research, Inc.
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