Strategic Asset Allocation in a Continuous-Time VAR Model
John Y. Campbell
Harvard University - Department of Economics; National Bureau of Economic Research (NBER)
Harvard Business School
Jorge F. Rodriguez
Luis M. Viceira
Harvard Business School - Finance Unit; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)
CEPR Discussion Paper No. 4160
This Paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The Paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.
Number of Pages in PDF File: 38
JEL Classification: G12working papers series
Date posted: January 12, 2004
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