Dynamic Asset Allocation Under Inflation

Posted: 29 Nov 2003

See all articles by Michael J. Brennan

Michael J. Brennan

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

Yihong Xia

University of California, Los Angeles (Deceased)

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Abstract

We develop a simple framework for analyzing a finite-horizon investor's asset allocation problem under inflation when only nominal assets are available. The investor's optimal investment strategy and indirect utility are given in simple closed form. Hedge demands depend on the investor's horizon and risk aversion and on the maturities of the bonds included in the portfolio. When short positions are precluded, the optimal strategy consists of investments in cash, equity, and a single nominal bond with optimally chosen maturity. Both the optimal stock-bond mix and the optimal bond maturity depend on the investor's horizon and risk aversion.

Suggested Citation

Brennan, Michael John and Xia, Yihong, Dynamic Asset Allocation Under Inflation. Journal of Finance, Vol. 57, pp. 1201-1238, 2002, Available at SSRN: https://ssrn.com/abstract=313477

Michael John Brennan (Contact Author)

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

Los Angeles, CA 90095-1481
United States
310-825 3587 (Phone)
310-206 8419 (Fax)

Yihong Xia

University of California, Los Angeles (Deceased)

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