Journal of Financial Economics Vol. 67 No. 1 2003
A multivariate model of strategic asset allocation
open access
Abstract
We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely long-lived investor with Epstein–Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and post-war quarterly U.S. data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. Long-term inflation-indexed bonds greatly increase the utility of conservative investors.
- DOI
- 10.1016/s0304-405x(02)00231-3
- Volume
- 67
- Issue
- 1
- Pages
- 41-80
- Language
- en
- Sources
- crossref bibtex:phds-export.bib openalex