Consumption and Portfolio Decisions When Expected Returns are Time Varying

Campbell, John Y.; Viceira, Luis M.

doi:10.3386/w5857

Cited by 425 publications

(723 citation statements)

References 27 publications

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“…For the market portfolio, the hedging demand is positive but moderate (15%). This is consistent with findings in Barberis (2000) and Campbell and Viceira (1999). The reason for the positive hedging demand is the negative covariance between shocks to the dividend yield and stock market returns which leads investors with a long horizon to hold more in stocks.…”

Section: Rebalancing and Hedging Demandssupporting

confidence: 90%

“…Taken together, a 10-year investor would require a compensatory return of 6% per annum to ignore both the evidence of regimes and predictability from the dividend yield. Though relatively high, this estimate of the annualized utility loss is within the range of values recently reported in the literature and well below those reported by Campbell and Viceira (1999) and Lynch (2001).…”

Section: Utility Cost Calculationssupporting

confidence: 79%

“…This model allows for predictability in returns through the lagged values of z t . It embeds a variety of single-state VAR models that have been considered in recent studies including Barberis (2000), Campbell and Viceira (1999) and Kandel and Stambaugh (1996). This model is complicated by the joint presence of linear and non-linear predictability patterns, the latter arising due to time-variations in the filtered state probabilities.…”

Section: Models For Regimes In the Joint Return Processmentioning

confidence: 99%

“…10 Incorporating the predictor variables, z b , at the decision points, b, the derived utility of wealth is…”

Section: The Asset Allocation Problemmentioning

confidence: 99%

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Size and Value Anomalies under Regime Shifts

Guidolin

Timmermann

2007

SSRN Journal

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This paper finds strong evidence of time-variations in the joint distribution of returns on a stock market portfolio and portfolios tracking size-and value effects. Mean returns, volatilities and correlations between these equity portfolios are found to be driven by underlying regimes that introduce short-run market timing opportunities for investors. The magnitude of the premia on the size and value portfolios and their hedging properties are found to vary across regimes. Regimes are shown to have a large impact on the optimal asset allocation -especially under rebalancing -and on investors' utility. Regimes also have a considerable impact on hedging demands, which are positive when the investor starts from more favorable regimes and negative when starting from bad states. Recursive out-of-sample forecasting experiments show that portfolio strategies based on models that account for regimes dominate single-state benchmarks.

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Section: Rebalancing and Hedging Demandssupporting

confidence: 90%

Section: Utility Cost Calculationssupporting

confidence: 79%

Section: Models For Regimes In the Joint Return Processmentioning

confidence: 99%

“…10 Incorporating the predictor variables, z b , at the decision points, b, the derived utility of wealth is…”

Section: The Asset Allocation Problemmentioning

confidence: 99%

See 2 more Smart Citations

Size and Value Anomalies under Regime Shifts

Guidolin

Timmermann

2007

SSRN Journal

View full text Add to dashboard Cite

show abstract

“…We will refer to λ(t , τ ) def = e − R τ t ρs ds λ τ 12 See Appendix. 13 Either with terminal or with intermediate consumption.…”

Section: The Market Price Of Riskmentioning

confidence: 99%

Nonmyopic Optimal Portfolios in Viable Markets

Cvitanić

Malamud

2010

SSRN Journal

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Cointegration, information transmission, and the lead‐lag effect between industry portfolios and the stock market

Troster

Penalva

Taamouti

et al. 2021

Journal of Forecasting

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This paper shows that lagged information transmission between industry portfolio and market prices entails cointegration. We analyze monthly industry portfolios in the US market for the period 1963-2015. We find cointegration between six industry portfolio and market prices. We show that the equilibrium error, the long-term common factor between industry portfolio and market cumulative returns, has strong predictive power for excess industry portfolio returns. In line with gradual information diffusion across connected industries, the equilibrium error proxies for changes in the investment opportunity set that lead to industry return predictability by informed investors. Forecasting models including the equilibrium error have superior forecasting performance relative to models without it, illustrating the importance of cointegration between the industry portfolio and market prices. Overall, our findings have important implications for investment and risk-management decisions, since the out-of-sample explanatory power of the equilibrium error is economically meaningful for making optimal portfolio allocations.

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Consumption and Portfolio Decisions When Expected Returns are Time Varying

Cited by 425 publications

References 27 publications

Size and Value Anomalies under Regime Shifts

Size and Value Anomalies under Regime Shifts

Nonmyopic Optimal Portfolios in Viable Markets

Cointegration, information transmission, and the lead‐lag effect between industry portfolios and the stock market

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