Resolution of a Financial Puzzle

Michael Brennan and Yihong Xia

University of California at Los Angeles, Anderson Graduate School of Management from Anderson Graduate School of Management, UCLA

Abstract: The apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors pointed out by Canner et al (1997) is shown to be explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks.

Date: 1998-11-01
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