Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor

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Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor

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Title: Stock Market Mean Reversion and the Optimal Equity Allocation of a Long-Lived Investor
Author: Campbell, John Y.; Cocco, Joao; Gomes, Francisco; Maenhout, Pascal J.; Viceira, Luis Manuel

Note: Order does not necessarily reflect citation order of authors.

Citation: Campbell, John Y., João Cocco, Francisco Gomes, Pascal J. Maenhout, and Luis M. Viceira. 2001. Stock market mean reversion and the optimal equity allocation of a long-lived investor. European Finance Review 5(3): 269-292.
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Abstract: This paper solves numerically the intertemporal consumption and portfolio choice problem of an infinitely-lived investor who faces a time-varying equity premium. The solutions we obtain are very similar to the approximate analytical solutions of Campbell and Viceira (1999), except at the upper extreme of the state space where both the numerical consumption and portfolio rules flatten out. We also consider a constrained version of the problem in which the investor faces borrowing and short-sales restrictions. These constraints bind when the equity premium moves away from its mean in either direction, and are particularly severe for risk-tolerant investors. The constraints have substantial effects on optimal consumption, but much more modest effects on optimal portfolio choice in the region of the state space where they are not binding.
Published Version: http://dx.doi.org/10.1023/A:1013860504885
Terms of Use: This article is made available under the terms and conditions applicable to Other Posted Material, as set forth at http://nrs.harvard.edu/urn-3:HUL.InstRepos:dash.current.terms-of-use#LAA
Citable link to this page: http://nrs.harvard.edu/urn-3:HUL.InstRepos:3353758

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  • FAS Scholarly Articles [6464]
    Peer reviewed scholarly articles from the Faculty of Arts and Sciences of Harvard University
 
 

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