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Long-term real dynamic investment planning

Russell Gerrard, Munir Hiabu, Jens Perch Nielsen and Peter Vodička

Insurance: Mathematics and Economics, 2020, vol. 92, issue C, 90-103

Abstract: When long-term savers plan for retirement they need to know their investment prospects in terms of real income (Merton, 2014). While inflation has traditionally been considered as a complication in financial analysis and financial practise, we obtain enhanced predictability and model fit if the real returns are targeted in conjunction with earnings-by-price minus inflation as predictor. For this latter case, we propose an investment strategy of updating the simple classical Merton proportion as we go along. This simple strategy is very close to the complicated theoretically optimal solution but has comparably much lower parameter uncertainty.

Keywords: Long-term Investment; Forecasting Returns; Nonmyopic Strategy; Optimal Investment; Strategy; Econometrics (search for similar items in EconPapers)
JEL-codes: G11 G17 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.insmatheco.2020.03.002

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