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Strategic Asset AllocationPortfolio Choice for Long-Term Investors$
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John Y. Campbell and Luis M. Viceira

Print publication date: 2002

Print ISBN-13: 9780198296942

Published to Oxford Scholarship Online: November 2003

DOI: 10.1093/0198296940.001.0001

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Strategic Asset Allocation in Continuous Time

Strategic Asset Allocation in Continuous Time

Chapter:
(p.120) 5 Strategic Asset Allocation in Continuous Time
Source:
Strategic Asset Allocation
Author(s):

John Y. Campbell (Contributor Webpage)

Luis M. Viceira (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/0198296940.003.0005

Discusses solution methods for dynamic asset allocation problems in a continuous‐time framework, and uses them to explore optimal portfolio choice with time‐varying volatility and with parameter uncertainty. When stock market volatility is time‐varying, short‐term investors should reduce the allocation to equities in response to volatility increases. Long‐term investors should go further and hedge volatility risk by reducing their average allocation to equities when the correlation of volatility shocks and realized excess stock returns is negative, but empirically this effect is small in the US stock market. Uncertainty about mean asset returns and the use of updating rules based on realized returns generate a negative inter‐temporal hedging demand that dampens the demand for stocks by conservative investors, contrary to the mean‐reversion effect discussed in Chapter 4.

Keywords:   asset allocation, continuous‐time finance, dynamic programming, hedging, mean asset returns, portfolio choice, realized returns, uncertainty, updating rules, volatility

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