Parametric Portfolio Policies in the Surplus Consumption Ratio

26 Pages Posted: 3 Jun 2015

See all articles by Joachim Inkmann

Joachim Inkmann

University of Melbourne - Department of Finance; Financial Research Network (FIRN)

Zhen Shi

University of Melbourne; Financial Research Network (FIRN)

Date Written: June 2015

Abstract

The surplus consumption ratio plays a central role as a state variable in successful attempts to explain the time series properties of stock and bond prices with consumptionā€based asset pricing models. In this paper, optimal portfolio policies for a strategic investor who maximizes the conditionally expected utility of terminal wealth are parameterized as a polynomial in the surplus consumption ratio. Optimal portfolio policies are estimated using a method of moments estimator based on Euler equations. Unconditional portfolio policies are rejected in favor of conditional policies. Lower order polynomials are rejected in favor of higher order polynomials. Optimal stock and bond allocations are clearly countercyclical.

JEL Classification: G11

Suggested Citation

Inkmann, Joachim and Shi, Zhen, Parametric Portfolio Policies in the Surplus Consumption Ratio (June 2015). International Review of Finance, Vol. 15, Issue 2, pp. 257-282, 2015. Available at SSRN: https://ssrn.com/abstract=2613722 or http://dx.doi.org/10.1111/irfi.12049

Joachim Inkmann (Contact Author)

University of Melbourne - Department of Finance ( email )

Level 12, 198 Berkeley Street
University of Melbourne, Victoria 3010
Australia
0061 3 9035 8177 (Phone)

HOME PAGE: http://orcid.org/0000-0002-5526-7648

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Zhen Shi

University of Melbourne ( email )

185 Pelham Street
Carlton, Victoria 3053
Australia
0061 3 9035 8173 (Phone)
0061 3 8344 6914 (Fax)

HOME PAGE: http://www.finance.unimelb.edu.au/who/staffweb.cfm?StaffNo=135

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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