Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information

Abstract

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Are Stocks Really Less Volatile in the Long Run?

“…The above studies find that predictive variance is substantially higher than estimates of true variance that ignore parameter uncertainty. However, all three studies also find that long-horizon predictive variance is lower than short-horizon variance for the horizons considered-up to 10 years in Barberis (2000), up to 20 years in Stambaugh (1999), and up to 50 years in Hoevenaars et al (2007). 2 In contrast, we often find that predictive variance even at a 10-year horizon is higher than at a 1-year horizon.…”

“…The effects of parameter uncertainty on the predictive variance of long-horizon returns are analyzed in previous studies, such as Stambaugh (1999), Barberis (2000), and Hoevenaars et al (2007). Barberis discusses how parameter uncertainty essentially compounds across periods and exerts stronger effects at long horizons.…”

Another Take on Real Estate's Role in Mixed‐Asset Portfolio Allocations

“…Consider as some examples: Barberis (), Campbell and Viceira () and Hoevenaars et al . (). Among those who recently examine long‐run volatility measures directly in the context of private‐market real estate, at least three papers are notable: MacKinnon and Zaman (), Cheng et al .…”

Investing for the Long-Run in European Real Estate

“…11 8 As it is well known from the Bayesian econometrics literature, integrating the joint posterior for zt,T and θ with respect to the posterior for θ delivers a density for returns with fatter tails which simply reflect the additional (estimation) uncertainty implied by θ being random. 9 Hoovernaars, Molenaar, Schotman, and Steenkamp (2006) show that the priors may have important effects on optimal portfolio choices. While our paper uses the standard uninformative type to minimize these effects, Hoovernaars et al (2006) develop the concept of robust portfolio: the portfolio of an investor with a prior that has minimal welfare costs when evaluated under a wide range of alternative priors.…”