Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information

36 Pages Posted: 1 Jun 2006 Last revised: 9 Mar 2013

See all articles by Roy P. M. M. Hoevenaars

Roy P. M. M. Hoevenaars

APG Asset Management

Roderick Molenaar

Robeco Asset Management

Peter C. Schotman

Maastricht University - Department of Finance

Tom Steenkamp

ABP Investments - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: October 2, 2012

Abstract

We study the effect of parameter uncertainty on the long-run risk for three asset classes: stocks, bills and bonds. We model return dynamics as a Bayesian vector autoregression. With an uninformative prior we find that parameter uncertainty raises the annualised long-run volatilities of all three asset classes proportionally with the same factor relative to estimates that are conditional on ML parameter estimates. Correlations among returns appear robust against parameter uncertainty. As a result the effect of the investment horizon on optimal asset allocations is much weaker compared to models in which only equity returns are subject to parameter uncertainty. While equity is more volatile, the same holds for the other asset classes. Results are sensitive to alternative informative priors, but generally the term structure of risk for stocks and bonds are relatively flat for investment horizons up to 15 years.

Keywords: strategic asset allocation, bayesian vector autoregression, parameter uncertainty

JEL Classification: C32, G11, C11

Suggested Citation

Hoevenaars, Roy P. M. M. and Molenaar, Roderick and Schotman, Peter C. and Steenkamp, Tom, Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information (October 2, 2012). Available at SSRN: https://ssrn.com/abstract=905003 or http://dx.doi.org/10.2139/ssrn.905003

Roy P. M. M. Hoevenaars (Contact Author)

APG Asset Management ( email )

P.O. Box 75283
1070 AG
Amsterdam
Netherlands
+31206048313 (Phone)

Roderick Molenaar

Robeco Asset Management ( email )

Weena 850
Rotterdam, 3014 DA
Netherlands

Peter C. Schotman

Maastricht University - Department of Finance ( email )

P.O. Box 616
Maastricht, 6200 MD
Netherlands
+31 43 388 3862 (Phone)
+31 43 388 4875 (Fax)

Tom Steenkamp

ABP Investments - Research Department ( email )

WTC Schiphol Airport
Tower C, 5th Floor P.O. Box 75753
Schiphol NL-1118 ZX
Netherlands

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