Conditional Asset Allocation, Hedging and Intertemporal Asset Pricing

34 Pages Posted: 22 Mar 2002

See all articles by Guojun Wu

Guojun Wu

University of Houston; China Academy of Financial Research (CAFR)

Bruno Gerard

BI Norwegian Business School - Department of Finance

Date Written: February 2002

Abstract

We jointly estimate and test a conditional asset pricing model which includes long term interest rate risk as a potentially priced factor for four broad classes of assets - large stocks, small stocks, long term Treasury bonds and corporate bonds. We find that the premium for long bond risk is the main component of the risk premiums of Treasury bond and corporate bond portfolios, while it represents a small fraction of total risk premiums for equities. Our results suggest that investors perceive stocks as hedges against variations in the investment opportunity set. Since these four asset classes represent some of the most important for investors, we proceed to use our estimates to compute the optimal period by period asset allocations for investors with different risk preferences and trading strategies. We decompose the trades in their market timing, hedging and speculative components.

Keywords: Asset Pricing, GARCH, Portfolio Choice

JEL Classification: G11, G12

Suggested Citation

Wu, Guojun and Gerard, Bruno, Conditional Asset Allocation, Hedging and Intertemporal Asset Pricing (February 2002). Available at SSRN: https://ssrn.com/abstract=302741 or http://dx.doi.org/10.2139/ssrn.302741

Guojun Wu (Contact Author)

University of Houston ( email )

220F Melcher Hall
Houston, TX 77204-6021
United States
713-743-4813 (Phone)
713-743-4789 (Fax)

HOME PAGE: http://www.bauer.uh.edu/wu

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

Bruno Gerard

BI Norwegian Business School - Department of Finance ( email )

Nydalsveien 37
Oslo, N-0484
Norway
+4746410506 (Phone)

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