A Top-Down Method for Long-Term Investing
55 Pages Posted: 18 Feb 2021
Date Written: February 3, 2021
This paper bases long-term investing on a tradeable stochastic discount factor (SDF), relates it to the growth optimal portfolio and argues for a top-down method, where modeling efforts are directed at capturing its long-run dynamics in a generalized setting. This differs from the common, cumbersome bottom-up method of modeling many risky securities in the marketplace. Various optimal portfolio strategies can be implemented efficiently using fractional expectations of the SDF. This paper illustrates empirically for the US stock market that the proposed method leads to higher wealth, higher returns on investment and higher long-term utility levels.
Keywords: Stochastic discount factor, optimal portfolio, growth optimal portfolio, long-term investing
JEL Classification: G11, G13
Suggested Citation: Suggested Citation