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

Thomas Leirvik

Finance Research Letters, 2014, vol. 11, issue 3, 231-237

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.

Keywords: Investment; Bond stock mix; Asset allocation puzzle; Stochastic interest rates (search for similar items in EconPapers)
JEL-codes: C02 C60 G11 G12 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:11:y:2014:i:3:p:231-237

DOI: 10.1016/j.frl.2014.02.006

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