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Consumption and Portfolio Decisions When Expected Returns are Time Varying

John Campbell () and Luis Viceira ()

Scholarly Articles from Harvard University Department of Economics

Abstract: This paper presents an approximate analytical solution to the optimal consumption and portfolio choice problem of an infinitely lived investor with Epstein-Zin-Weil utility who faces a constant riskless interest rate and a time-varying equity premium. When the model is calibrated to U. S. stock market data, it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by 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: 1999
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Published in Quarterly Journal of Economics

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http://dash.harvard.edu/bitstream/handle/1/3163266/campbell_consumption.pdf (application/pdf)

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 (1998)
Working Paper: Consumption and Portfolio Decisions When Expected Returns are Time Varying (1996) Downloads
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