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The bond–stock mix under time-varying interest rates and predictable stock returns

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  • Leirvik, Thomas

Abstract

I investigate the allocation of wealth to cash, bonds, and stocks, along with the bond-to-stock ratio (BSR) when interest rates are time-varying and stock returns are predictable via the dividend-price ratio (DPR). The bond–stock mix and the BSR vary with the deviation of the current level of the DPR from its long-run mean and the correlations between all asset classes. The BSR may decrease over time, which contradicts both previously reported results on the matter as well as popular advice. Finally, I show that it is only at the investment horizon that the BSR is independent of risk aversion.

Suggested Citation

  • Leirvik, Thomas, 2014. "The bond–stock mix under time-varying interest rates and predictable stock returns," Finance Research Letters, Elsevier, vol. 11(3), pages 231-237.
    • Handle: RePEc:eee:finlet:v:11:y:2014:i:3:p:231-237
    DOI: 10.1016/j.frl.2014.02.006
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    References listed on IDEAS

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    More about this item

    Keywords

    Investment; Bond stock mix; Asset allocation puzzle; Stochastic interest rates;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • C60 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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