Portfolio choice with stochastic interest rates and learning about stock return predictability

Marcos Escobar Anel (), Sebastian Ferrando and Alexey Rubtsov

International Review of Economics & Finance, 2016, vol. 41, issue C, 347-370

Abstract: We analyze how investors should optimally choose to invest under the assumptions that interest rates are stochastic and stock returns are predictable with observed and unobserved factors. The stock risk premium is taken to be an affine function of the predictive variables and the stock return volatility is assumed to depend on the observed factor. The latent factor is estimated based on the observations. It is shown that stock return predictability can significantly impact the optimal bond portfolio. Considerable welfare benefits may arise from using bonds in learning about/hedging against stock return predictors.

Keywords: Portfolio choice; Stochastic interest rates; Return predictability; Learning; Welfare loss (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:reveco:v:41:y:2016:i:c:p:347-370

DOI: 10.1016/j.iref.2015.07.003

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