Dynamic Asset Allocation for Stocks, Bonds, and Cash

Isabelle Bajeux-Besnainou, James V. Jordan and Roland Portait
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Isabelle Bajeux-Besnainou: George Washington University
James V. Jordan: National Economic Research Associates
Roland Portait: CNAM and ESSEC

The Journal of Business, 2003, vol. 76, issue 2, 263-288

Abstract: Closed-form solutions for HARA optimal portfolios are obtained in a dynamic portfolio optimization model in three assets (stocks, bonds, and cash) in a Vasicek-type model of stochastic interest rates with correlated stock prices. The HARA is a buy-and-hold combination of a zero-coupon bond with maturity matching the investor's horizon and a "CRRA mutual fund." This simple characterization facilitates insights about investor behavior over time and provides explanations on the rational use of convex versus concave investment strategies. The model illuminates clearly the role of the different market parameters and relative risk aversion in portfolio strategies.

Date: 2003
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Persistent link: https://EconPapers.repec.org/RePEc:ucp:jnlbus:v:76:y:2003:i:2:p:263-288

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