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Parametric Portfolio Policies in the Surplus Consumption Ratio

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  • Joachim Inkmann
  • Zhen Shi

Abstract

The surplus consumption ratio plays a central role as a state variable in successful attempts to explain the time series properties of stock and bond prices with consumption-based asset pricing models. In this paper, optimal portfolio policies for a strategic investor who maximizes the conditionally expected utility of terminal wealth are parameterized as a polynomial in the surplus consumption ratio. Optimal portfolio policies are estimated using a method of moments estimator based on Euler equations. Unconditional portfolio policies are rejected in favor of conditional policies. Lower order polynomials are rejected in favor of higher order polynomials. Optimal stock and bond allocations are clearly countercyclical.

Suggested Citation

  • Joachim Inkmann & Zhen Shi, 2015. "Parametric Portfolio Policies in the Surplus Consumption Ratio," International Review of Finance, International Review of Finance Ltd., vol. 15(2), pages 257-282, June.
    • Handle: RePEc:bla:irvfin:v:15:y:2015:i:2:p:257-282
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    File URL: http://hdl.handle.net/10.1111/irfi.12049
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    References listed on IDEAS

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