Citations (2)



Implications of Long-Run Risk for Asset Allocation Decisions

Doron Avramov

Hebrew University of Jerusalem

Scott Cederburg

University of Arizona - Department of Finance

March 1, 2012

Netspar Discussion Paper No. 03/2012-011

This paper proposes a structural approach to long-horizon asset allocation. In particular, the investor draws inferences about asset returns from a vector autoregression (VAR) with economic restrictions on the intercept, slope, and covariance matrix implied by the long-run risk model of Bansal and Yaron (2004). Comparing the optimal allocations of investors using the longrun risk VAR versus an unrestricted reduced-form VAR reveals stark differences in portfolio strategies. Long-run risk investors are quite conservative relative to reduced-form investors due to intertemporal hedging concerns. Despite the differing strategies, both investors achieve success in timing the market. The gains of the long-run risk investor appear to arise from his ability to avoid exposure to large negative events, while the reduced-form investor better capitalizes on periods of high average returns.

Number of Pages in PDF File: 36

JEL Classification: E21, E32, G11

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Date posted: April 28, 2012  

Suggested Citation

Avramov, Doron and Cederburg, Scott, Implications of Long-Run Risk for Asset Allocation Decisions (March 1, 2012). Netspar Discussion Paper No. 03/2012-011. Available at SSRN: http://ssrn.com/abstract=2046566 or http://dx.doi.org/10.2139/ssrn.2046566

Contact Information

Doron Avramov
Hebrew University of Jerusalem ( email )
Mount Scopus
Jerusalem, IL 91905
HOME PAGE: http://pluto.huji.ac.il/~davramov/
Scott Cederburg (Contact Author)
University of Arizona - Department of Finance ( email )
McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States
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