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Intertemporal portfolio allocation and hedging demand: An application to South Africa

Author

Listed:
  • Esti van Wyk de Vries

    () (Department of Economics, University of Pretoria)

  • Rangan Gupta

    () (Department of Economics, University of Pretoria)

  • Renee van Eyden

    () (Department of Economics, University of Pretoria)

Abstract

This paper analyses the intertemporal hedging demand for stocks and bonds in South Africa (SA), the United Kingdom (UK) and the United States (US). The analysis is done using an approximate solution method for the optimal consumption and wealth portfolio problem of an infinitely long-lived investor as developed by Campbell, Chan and Viceira (2003) and extended by Rapach and Wohar (2009). Investors are assumed to have Epstein-Zin-Weil-type preferences and face asset returns described by a first-order vector autoregression in returns and state variables. The results show that the mean intertemporal hedging demands for stocks are considerably smaller in SA than in the UK or the US, whilst the mean intertemporal hedging demand for bonds are not significantly different from zero in any of the countries considered. Furthermore, it is found that stocks in the US and the UK do not present a useful hedging opportunity for an investor in SA, nor do SA stocks present a useful hedging opportunity for investors from the UK or the US.

Suggested Citation

  • Esti van Wyk de Vries & Rangan Gupta & Renee van Eyden, 2011. "Intertemporal portfolio allocation and hedging demand: An application to South Africa," Working Papers 201133, University of Pretoria, Department of Economics.
  • Handle: RePEc:pre:wpaper:201133
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    Cited by:

    1. Spierdijk, Laura & Umar, Zaghum, 2014. "Stocks for the long run? Evidence from emerging markets," Journal of International Money and Finance, Elsevier, vol. 47(C), pages 217-238.
    2. Ali Babikir & Henry Mwambi, 2016. "Evaluating the combined forecasts of the dynamic factor model and the artificial neural network model using linear and nonlinear combining methods," Empirical Economics, Springer, vol. 51(4), pages 1541-1556, December.

    More about this item

    Keywords

    Intertemporal hedging demand; Multi-period portfolio choice problem; Parametric bootstrap; Return predictability; South Africa;

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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