A multivariate model of strategic asset allocation

Abstract

Campbell acknowledges the financial support of the National Science Foundation, and Viceira the financial support of the Division of Research of the Harvard Business School. We are grateful for helpful comments and suggestions by Ludger Hentschel, Anthony Lynch, an anonymous referee, and seminar participants at Harvard, the 1999 Intertemporal Asset Pricing Conference hosted by the Centre Interuniversitaire de Recherche en Analyse des Organizations (CIRANO) of Montreal and the 2000 WFA Meetings. Josh White provided invaluable research assistance. The views expressed herein are those of the authors and not necessarily those of the National Bureau of Economic Research.

A stochastic programming approach for multi-period portfolio optimization

“…Approximate analytical solutions are provided by, e.g., Campbell and Viceira (1999, Campbell et al (2004), and Chacko and Viceira (2005). Approximate numerical solutions can be found in, e.g., Schroder and Skiadas (1999) and Campbell et al (2003).…”

“…An important reference for the present paper is Campbell et al (2003). They model asset returns and state variables as a first-order vector autoregression VAR(1) and consider Epstein-Zin utility with an infinite planning horizon.…”

“…The uncertainty associated with the consumption-investment problem and time-varying investment opportunities are modeled by a K -dimensional VAR(1) process as in Barberis (2000) or Campbell et al (2003). The vector process consists of asset returns and other state variables (e.g., dividend yields or interest rate spreads).…”

“…This design accounts for the short-term dynamics of the VAR model in the first few years, and the possibility of frequent rebalancing. For modeling the subsequent steady state period we have considered three candidate models: Richard (1975), Campbell et al (2003), and Jurek and Viceira (2005). Whereas the latter two account for time-variation in investment opportunities, Richard (1975) assumes a multivariate geometric Brownian motion for the risky assets.…”

“…In Sect. 4 results from the SLP are compared to those in Campbell et al (2003), and results for an extended setting are presented. Section 5 concludes.…”