A Multivariate Model of Strategic Asset Allocation

81 Pages Posted: 6 Dec 2001

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Yeung Lewis Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance

Luis M. Viceira

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: November 2001

Abstract

Much recent work has documented evidence for the predictability of asset returns. We show how such predictability can affect the portfolio choices of long-lived investors who value wealth not for its own sake but for the consumption their wealth can support. We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely-lived investor with Epstein-Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and postwar quarterly US data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. We extend the analysis to consider long-term inflation-indexed bonds and find that these bonds greatly increase the utility of conservative investors, who should hold large positions when they are available.

Keywords: Intertemporal hedging demand, portfolio choice, predictability, strategic asset allocation

JEL Classification: G12

Suggested Citation

Campbell, John Y. and Chan, Yeung Lewis and Viceira, Luis M., A Multivariate Model of Strategic Asset Allocation (November 2001). CEPR Discussion Paper No. 3070. Available at SSRN: https://ssrn.com/abstract=292316

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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Yeung Lewis Chan

Hong Kong University of Science & Technology (HKUST) - Department of Finance ( email )

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Luis M. Viceira

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6331 (Phone)
617-496-6592 (Fax)

HOME PAGE: http://www.people.hbs.edu/lviceira

National Bureau of Economic Research (NBER)

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