Download or read book Robust Consumption and Portfolio Choice for Time varying Investment Opportunities written by Hening Liu and published by . This book was released on 2009 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Consumption and Portfolio Decisions When Expected Returns are Time Varying written by John Y. Campbell and published by . This book was released on 2010 with total page 74 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely-lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one.
Download or read book Portfolio and Consumption Choice with Stochastic Investment Opportunities and Habit Formation in Preferences written by Claus Munk and published by . This book was released on 2002 with total page 43 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study the dynamic consumption and portfolio choice of an investor who has habit formation in preferences and access to a complete financial market. For general, possibly non-Markov, dynamics of market prices, we provide an exact characterization of the optimal behavior in terms of two relatively simple and intuitively interpretable stochastic processes. We study in more detail the optimal strategies in two concrete examples of time-varying investment opportunities. Firstly, we derive a closed-form solution of the optimal consumption and portfolio choice with mean-reverting stock returns. Secondly, with Cox-Ingersoll-Ross interest rate dynamics we can express the optimal strategies in terms of the solution to a partial differential equation, which has an explicit solution for time-additive preferences, but not with habit formation. Our numerical examples show that, while hedging demands for various assets are affected differently by habit persistence, the main effect on relative asset allocations stems from the fact that some assets (bonds and cash) are better investment objects than others (stocks) when it comes to ensuring that future consumption will not fall below the habit level. The implications of habit persistence in models with labor income are also addressed.
Download or read book Strategic Asset Allocation written by John Y. Campbell and published by OUP Oxford. This book was released on 2002-01-03 with total page 272 pages. Available in PDF, EPUB and Kindle. Book excerpt: Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
Download or read book Dynamic Portfolio and Consumption Decisions Under Ambiguity for Time Varying Investment Opportunities written by Hening Liu and published by . This book was released on 2008 with total page 166 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Portfolio Selection and Asset Pricing Models of Financial Economics and Their Applications in Investing written by Jamil Baz and published by McGraw Hill Professional. This book was released on 2022-09-06 with total page 426 pages. Available in PDF, EPUB and Kindle. Book excerpt: This uniquely comprehensive guide provides expert insights into everything from financial mathematics to the practical realities of asset allocation and pricing Investors like you typically have a choice to make when seeking guidance for portfolio selection―either a book of practical, hands-on approaches to your craft or an academic tome of theories and mathematical formulas. From three top experts, Portfolio Selection and Asset Pricing strikes the right balance with an extensive discussion of mathematical foundations of portfolio choice and asset pricing models, and the practice of asset allocation. This thorough guide is conveniently organized into four sections: Mathematical Foundations―normed vector spaces, optimization in discrete and continuous time, utility theory, and uncertainty Portfolio Models―single-period and continuous-time portfolio choice, analogies, asset allocation for a sovereign as an example, and liability-driven allocation Asset Pricing―capital asset pricing models, factor models, option pricing, and expected returns Robust Asset Allocation―robust estimation of optimization inputs, such as the Black-Litterman Model and shrinkage, and robust optimizers Whether you are a sophisticated investor or advanced graduate student, this high-level title combines rigorous mathematical theory with an emphasis on practical implementation techniques.
Download or read book Financial Markets and the Real Economy written by John H. Cochrane and published by Now Publishers Inc. This book was released on 2005 with total page 117 pages. Available in PDF, EPUB and Kindle. Book excerpt: Financial Markets and the Real Economy reviews the current academic literature on the macroeconomics of finance.
Download or read book Mathematical Modelling and Numerical Methods in Finance written by Alain Bensoussan and published by Elsevier. This book was released on 2009-06-16 with total page 743 pages. Available in PDF, EPUB and Kindle. Book excerpt: Mathematical finance is a prolific scientific domain in which there exists a particular characteristic of developing both advanced theories and practical techniques simultaneously. Mathematical Modelling and Numerical Methods in Finance addresses the three most important aspects in the field: mathematical models, computational methods, and applications, and provides a solid overview of major new ideas and results in the three domains. Coverage of all aspects of quantitative finance including models, computational methods and applications Provides an overview of new ideas and results Contributors are leaders of the field
Download or read book Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets written by George Chacko and published by . This book was released on 2010 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the optimal consumption and portfolio-choice problem of long-horizon investors who have access to a riskless asset with constant return and a risky asset (quot;stocksquot;) with constant expected return and time-varying precision-the reciprocal of volatility. Markets are incomplete, and investors have recursive preferences defined over intermediate consumption. The paper obtains a solution to this problem which is exact for investors with unit elasticity of intertemporal substitution of consumption and approximate otherwise. The optimal portfolio demand for stocks includes an intertemporal hedging component that is negative when investors have coefficients of relative risk aversion larger than one, and the instantaneous correlation between volatility and stock returns is negative, as typically estimated from stock return data. Our estimates of the joint process for stock returns and precision (or volatility) using U.S. data confirm this finding. But we also find that stock return volatility does not appear to be variable and persistent enough to generate large intertemporal hedging demands.
Download or read book Robustness written by Lars Peter Hansen and published by Princeton University Press. This book was released on 2016-06-28 with total page 453 pages. Available in PDF, EPUB and Kindle. Book excerpt: The standard theory of decision making under uncertainty advises the decision maker to form a statistical model linking outcomes to decisions and then to choose the optimal distribution of outcomes. This assumes that the decision maker trusts the model completely. But what should a decision maker do if the model cannot be trusted? Lars Hansen and Thomas Sargent, two leading macroeconomists, push the field forward as they set about answering this question. They adapt robust control techniques and apply them to economics. By using this theory to let decision makers acknowledge misspecification in economic modeling, the authors develop applications to a variety of problems in dynamic macroeconomics. Technical, rigorous, and self-contained, this book will be useful for macroeconomists who seek to improve the robustness of decision-making processes.
Download or read book Optimal Consumption and Investment Decisions Under Time Varying Risk Attitudes written by Felix Hentschel and published by . This book was released on 2015 with total page 27 pages. Available in PDF, EPUB and Kindle. Book excerpt: When finding the optimal consumption and investment decision rules of an individual, accounting for a change in the risk aversion over the life cycle is an important aspect. Different methods are suggested in the literature. This paper combines the two approaches of including a habit level (see e.g. Constantinides, 1990) and a coefficient of time-varying risk aversion (see e.g. Steffensen, 2011). The optimal decision rules are derived in a complete market and examined in a numerical analysis.Our findings show that with a coefficient of time-varying risk aversion, the shape of the decision rules, rather than just their magnitude, depends on the initial wealth of the individual. Furthermore, a time-increasing risk aversion and sufficiently large habit formation lead to a hump-shaped consumption pattern and a decreasing investment into the risky asset, as observed in the literature.
Download or read book Essays on Optimal Portfolio Decisions for Long term Investors written by Hui-Ju Tsai and published by . This book was released on 2010 with total page 116 pages. Available in PDF, EPUB and Kindle. Book excerpt: This dissertation contains two essays on the optimal portfolio decision for long-term investors. The first essay studies the optimal asset allocation for long-horizon investors with non-tradable labor income when multiple risky asset returns are predictable. It finds that more risk-averse investors hold a higher bond/stock ratio in their risky portfolios when labor income is positively correlated with stock return or independent of risky asset returns, but the reverse is true when labor income is positively correlated with bond return. The allocation to stock inherits the inverted U-shaped pattern of labor income growth with respect to expected time until retirement. These results suggest that popular recommendations of investment advisors that more conservative investors should hold a higher bond/stock ratio and that the portfolio allocation to stock should equal 100 minus age may both lack theoretical justification. In the out-of-sample performance test, the dynamic portfolio shows the highest mean returns and Sharpe ratio than two benchmark portfolios, justifying the economic significance of incorporating the time-variation of investment opportunities and nontradable labor income into investors' portfolio choice. The second essay studies employees' optimal portfolio in their defined contribution pension plans. Assuming a discrete time model with predictable risky asset returns, the essay finds that the employees' optimal portfolio decision can be greatly affected by the employees' time to retirement, risk preference, contribution rate as well as the correlation between labor income and asset returns. Performance test shows that the gains from adopting the dynamic portfolio strategy relative to several benchmark strategies, including the 1/n rule, the optimal static strategy with and without the consideration of asset return predictability, all stock strategy, and all company stock strategy, are economically significant and the economic gain increases with employees' risk aversion. The empirical evidence that employees invest significantly in their company stock in pension plans is difficult to be justified, even after the consideration of short-sale constraints, higher expected company stock return, employees' familiarity with their company, and employers' exclusive match policy. Over allocation to company stock can be very costly, especially to conservative employees.
Download or read book Optimal Consumption and Portfolio Choice for Long horizon Investors written by Luis Manuel Viceira Alguacil and published by . This book was released on 1998 with total page 490 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Factor Investing and Asset Allocation A Business Cycle Perspective written by Vasant Naik and published by CFA Institute Research Foundation. This book was released on 2016-12-30 with total page 192 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Download or read book Swing Pricing and Fragility in Open end Mutual Funds written by Dunhong Jin and published by International Monetary Fund. This book was released on 2019-11-01 with total page 46 pages. Available in PDF, EPUB and Kindle. Book excerpt: How to prevent runs on open-end mutual funds? In recent years, markets have observed an innovation that changed the way open-end funds are priced. Alternative pricing rules (known as swing pricing) adjust funds’ net asset values to pass on funds’ trading costs to transacting shareholders. Using unique data on investor transactions in U.K. corporate bond funds, we show that swing pricing eliminates the first-mover advantage arising from the traditional pricing rule and significantly reduces redemptions during stress periods. The positive impact of alternative pricing rules on fund flows reverses in calm periods when costs associated with higher tracking error dominate the pricing effect.
Download or read book Uncertainty in Economic Theory written by Itzhak Gilboa and published by Taylor & Francis. This book was released on 2004-08-02 with total page 577 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume brings together important papers, coupled with new introductions, in the massively influential area of uncertainty in economic theory. Seminal papers are available together for the first time in book format, with new introductions and under the steely editorship of Itzhak Gilboa - this book is a useful reference tool for economists all over the globe.
Download or read book Multi Period Trading Via Convex Optimization written by Stephen Boyd and published by . This book was released on 2017-07-28 with total page 92 pages. Available in PDF, EPUB and Kindle. Book excerpt: This monograph collects in one place the basic definitions, a careful description of the model, and discussion of how convex optimization can be used in multi-period trading, all in a common notation and framework.
