Learning about Predictability: The Effects of Parameter Uncertainty on Dynamic Asset Allocation
Top Cited Papers
- 1 February 2001
- journal article
- research article
- Published by Wiley in The Journal of Finance
- Vol. 56 (1) , 205-246
- https://doi.org/10.1111/0022-1082.00323
Abstract
This paper examines the effects of uncertainty about the stock return predictability on optimal dynamic portfolio choice in a continuous time setting for a longhorizon investor. Uncertainty about the predictive relation affects the optimal portfolio choice through dynamic learning, and leads to a state‐dependent relation between the optimal portfolio choice and the investment horizon. There is substantial market timing in the optimal hedge demands, which is caused by stochastic covariance between stock return and dynamic learning. The opportunity cost of ignoring predictability or learning is found to be quite substantial.Keywords
All Related Versions
This publication has 30 references indexed in Scilit:
- Dividend yields and expected stock returnsPublished by Elsevier ,2002
- Investing for the Long Run when Returns Are PredictableThe Journal of Finance, 2000
- Estimating Portfolio and Consumption Choice: A Conditional Euler Equations ApproachThe Journal of Finance, 1999
- Consumption and Portfolio Decisions when Expected Returns are Time VaryingThe Quarterly Journal of Economics, 1999
- Implementing Statistical Criteria to Select Return Forecasting Models: What Do We Learn?The Review of Financial Studies, 1999
- Strategic asset allocationJournal of Economic Dynamics and Control, 1997
- Efficient Capital Markets: IIThe Journal of Finance, 1991
- Permanent and Temporary Components of Stock PricesJournal of Political Economy, 1988
- Asset Pricing in a Production Economy with Incomplete InformationThe Journal of Finance, 1986
- Equilibrium Interest Rates and Multiperiod Bonds in a Partially Observable EconomyThe Journal of Finance, 1986