S-WoPEc
 
Scandinavian Working Papers in Economics
HomeAboutSeriesSubject/JEL codesAdvanced Search
Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2004-8:
Dynamic asset allocation and latent variables

Carsten Sørensen and Anders Bjerre Trolle

Abstract: We derive an explicit solution to the portfolio problem of a power utility investor with preferences for wealth at a ¯nite investment horizon. The investor can invest in assets with return dynamics described as part of a general multivariate model. The modeling framework encompasses discrete-time VAR-models where some of the state-variables (e.g. expected excess returns) may not be directly observable. A realistic multivariate model is estimated and applied to analyze the portfolio implications of investment horizon and return predictability when real interest rates and expected excess returns on stock and bonds are not directly observed but must be estimated as part of the problem faced by the investor. The solution exhibits small variability in portfolio allocations over time compared to the case when excess returns are assumed observable.

Keywords: Portfolio choice; predictability; VAR; unobserved state-variables; hedging demands; (follow links to similar papers)

JEL-Codes: G11; (follow links to similar papers)

55 pages, June 26, 2006

Before downloading any of the electronic versions below you should read our statement on copyright.
Download GhostScript for viewing Postscript files and the Acrobat Reader for viewing and printing pdf files.

Full text versions of the paper:

7151    PDF-file
Download Statistics

Questions (including download problems) about the papers in this series should be directed to Lars Nondal ()
Report other problems with accessing this service to Sune Karlsson () or Helena Lundin ().

Programing by
Design by Joachim Ekebom

Handle: RePEc:hhs:cbsfin:2004_008 This page was generated on 2014-12-14 19:21:44