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Macroeconomic environment, money demand and portfolio choice

Abraham Lioui () and Andrea Tarelli

European Journal of Operational Research, 2019, vol. 274, issue 1, 357-374

Abstract: We solve the portfolio choice problem of a long-term investor holding real balances, a stock index, multiple bonds and a remunerated money market account. We relate the factors driving the term structure and the equity premium to macroeconomic variables. When expected inflation decreases, the investor allocates more to the stock market, long-term bonds and unrewarded real balances, reducing short-maturity deposits. The optimal money demand: i) entails time variations in risk aversion; ii) reduces bond market positions when the importance of money in preferences increases, with little impact on the stock market participation; and iii) has quantitative implications in terms of horizon effects.

Keywords: Finance; Money demand; Term structure of interest rates; Portfolio choice (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1016/j.ejor.2018.09.039

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European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

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Handle: RePEc:eee:ejores:v:274:y:2019:i:1:p:357-374