DP4160 Strategic Asset Allocation in a Continuous Time VAR Model

Author(s): John Y Campbell , George Chacko , Jorge Rodriguez , Luis M Viceira

Publication Date: December 2003

Keyword(s): portfolio choice , time aggregation , intertemporal hedging , long-term investing , recursive utility

JEL(s): G12

Programme Areas: Financial Economics

Link to this Page: www.cepr.org/pubs/dps/DP4160.asp

This Paper derives an approximate solution to a continuous-time intertemporal portfolio and consumption choice problem. The problem is the continuous-time equivalent of the discrete-time problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1) process, while the riskless interest rate is constant. The Paper also shows how to obtain continuous-time parameters that are consistent with discrete-time econometric estimates. The continuous-time solution is the limit of that of Campbell and Viceira and has the property that conservative long-term investors have a large positive intertemporal hedging demand for stocks.