Dynamic Asset Allocation With Event Risk

Jun Liu, Francis Longstaff and Jun Pan

No 9103, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy-and-hold strategies. Jumps in prices and volatility both have important effects.

JEL-codes: G1 (search for similar items in EconPapers)
Date: 2002-08
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-ias
Note: AP
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Published as Liu, Jun, Francis A. Longstaff and Jun Pan. "Dynamic Asset Allocations with Event Risk." The Journal of Finance 58, 1 (February 2003): 231-259.

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Journal Article: Dynamic Asset Allocation with Event Risk (2003)
Working Paper: Dynamic Asset Allocation with Event Risk (2001)
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