Stratetic Asset Allocation with an Arbitrage-Free Bond Market using Dynamic Programming
Recently, Campbell and Viceira (2002) have introduced a framework that allows for dynamic decisions in asset allocation. This paper follows up their work by showing how uncertainties and expectations may affect consumption and portfolio decisions in an intertemporal dynamic framework. We use the framework laid out by Merton(1973) for this type of model. We integrate into Merton's framework multi-factor models of bond pricing that satisfy the No-Arbitrage Principle. However, in this situation the intertemporal dynamic consumption and portfolio decision cannot be studied analytically by the integration of the multi-factors bond models as in Merton's original approach. In this paper the intertemporal optimization problem will be solved numerically using the method of the Dynamic Programming will be employed. The numerical errors due to the discretization of time and state space will be examined. Various properties of the optimal solution will be demonstrated numerically.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf4:73. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.