EconPapers    
Economics at your fingertips  
 

Consumption and Portfolio Decisions When Expected Returns Are Time Varying

John Campbell () and Luis Viceira ()

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

Abstract: This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows an AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by long-lived investors whose risk-aversion coefficients exceed one. The optimal portfolio policy also involves timing the stock market. Failure to time or to hedge can cause large welfare losses relative to the optimal policy.

Date: 1998
References: Add references at CitEc
Citations: View citations in EconPapers (23) Track citations by RSS feed

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Journal Article: Consumption and Portfolio Decisions when Expected Returns are Time Varying (1999) Downloads
Working Paper: Consumption and Portfolio Decisions When Expected Returns are Time Varying (1999) Downloads
Working Paper: Consumption and Portfolio Decisions When Expected Returns are Time Varying (1996) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fth:harver:1835

Access Statistics for this paper

More papers in Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research Contact information at EDIRC.
Bibliographic data for series maintained by Thomas Krichel ().

 
Page updated 2019-10-16
Handle: RePEc:fth:harver:1835