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A Multivariate Model of Strategic Asset Allocation

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  • Chan, Yeung Lewis
  • Viceira, Luis
  • Campbell, John

Abstract

We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely long-lived investor with Epstein–Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and post-war quarterly U.S. data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. Long-term inflation-indexed bonds greatly increase the utility of conservative investors.

Suggested Citation

  • Chan, Yeung Lewis & Viceira, Luis & Campbell, John, 2003. "A Multivariate Model of Strategic Asset Allocation," Scholarly Articles 3163263, Harvard University Department of Economics.
    • Handle: RePEc:hrv:faseco:3163263
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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