A General Model of Dynamic Asset Allocation with Incomplete Information and Learning

48 Pages Posted: 28 Feb 2005 Last revised: 20 Jan 2011

See all articles by Carsten Sørensen

Carsten Sørensen

Copenhagen Business School - Department of Finance

Anders B. Trolle

Copenhagen Business School - Department of Finance

Date Written: February 8, 2006

Abstract

This paper develops a general and flexible multivariate discrete-time model of dynamic asset allocation with incomplete information and learning in the case of timevarying investment opportunity sets. The state variables are described by a vector autoregression and the investor is assumed to have normally distributed and possibly correlated priors on the values of the state variables. We apply the model to an investor who learns about the mean returns on the market and Fama-French SMB and HML portfolios when the size and value premia disappear (possibly stochastically) over time due to trading by other investors. The portfolio implications are shown to be substantial.

Keywords: Portfolio choice, learning, VAR, predictability, hedging demands

JEL Classification: G11

Suggested Citation

Sørensen, Carsten and Trolle, Anders B., A General Model of Dynamic Asset Allocation with Incomplete Information and Learning (February 8, 2006). Available at SSRN: https://ssrn.com/abstract=675625 or http://dx.doi.org/10.2139/ssrn.675625

Carsten Sørensen (Contact Author)

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Anders B. Trolle

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
199
Abstract Views
1,187
rank
189,650
PlumX Metrics