Dynamic Asset Allocation with Event Risk

Liu, Jun; Pan, Jun; Longstaff, Francis A.

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Dynamic Asset Allocation with Event Risk

NBER Working Paper No. w9103

45 Pages Posted: 16 Aug 2002 Last revised: 17 Nov 2022

See all articles by Jun Liu

Jun Liu

University of California, San Diego (UCSD) - Rady School of Management

Jun Pan

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF); National Bureau of Economic Research (NBER); China Academy of Financial Research (CAFR)

Francis A. Longstaff

University of California, Los Angeles (UCLA) - Finance Area

There are 2 versions of this paper

Date Written: August 2002

Abstract

Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy-and-hold strategies. Jumps in prices and volatility both have important effects.

Suggested Citation: Suggested Citation

Liu, Jun and Pan, Jun and Longstaff, Francis A., Dynamic Asset Allocation with Event Risk (August 2002). NBER Working Paper No. w9103, Available at SSRN: https://ssrn.com/abstract=324045