A Multivariate Model of Strategic Asset Allocation
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CitationCampbell, John Y., Yeung Lewis Chan, and Luis M. Viceira. 2003. A multivariate model of strategic asset allocation. Journal of Financial Economics 67, no. 1: 41-80.
AbstractWe 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.
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