Strategic Asset Allocation in a Continuous-Time VAR Model

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Strategic Asset Allocation in a Continuous-Time VAR Model

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Title: Strategic Asset Allocation in a Continuous-Time VAR Model
Author: Viceira, Luis; Rodriguez, Jorge; Chacko, George; Campbell, John

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Citation: Campbell, John Y., George Chacko, Jorge Rodriguez, and Luis M. Viceira. 2004. Strategic asset allocation in a continuous-time VAR model. Journal of Economic Dynamics and Control 28, no. 11: 2195-2214.
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Abstract: This paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (Q. J. Econ. 114 (1999) 433) in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.
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