Portfolio Choice under Inflation: Are Popular Recommendations Consistent with Rational Behavior?

Claus Munk, Carsten Sørensen, Tina Nygaard Vinther

Research output: Contribution to conferencePaperResearch

Abstract

We consider the optimal asset allocation choice of an investor who can invest in cash (a money market bank account), nominal bonds, and stocks (the stock index). The investor faces an incomplete market setting and is not able to perfectly hedge long run real interest rate risk using the available securities. The optimal investment strategy is consistent with the following features of popular investment advice which have been pointed out as puzzles: (i) a decreasing fraction of stocks in the portfolio as time passes towards the investment horizon, and (ii) a higher bond to stock ratio for more conservative (less risk tolerant) investors (Canner, Mankiw and Weil, 1997). The model for asset price dynamics is calibrated to US market data and, furthermore, risk aversion parameters and time horizons are calibrated so as to obtain a match between the optimal asset allocations and observed investment recommendations for "aggressive," "moderate," and "conservative" investor groups with different investment horizons.
Original languageEnglish
Publication date2002
Number of pages21
Publication statusPublished - 2002
EventEuropean Financial Management Association 2002 Annual Meetings - London, United Kingdom
Duration: 26 Jun 200229 Jun 2002
Conference number: 12
https://www.efmaefm.org/0EFMAMEETINGS/EFMA%20ANNUAL%20MEETINGS/2002-London/2002meetings.php

Conference

ConferenceEuropean Financial Management Association 2002 Annual Meetings
Number12
CountryUnited Kingdom
CityLondon
Period26/06/200229/06/2002
Internet address

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