Working Paper: CEPR ID: DP4160
Authors: John Y. Campbell; George Chacko; Jorge Rodriguez; Luis M. Viceira
Abstract: 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.
Keywords: intertemporal hedging; long-term investing; portfolio choice; recursive utility; time aggregation
JEL Codes: G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Predictable variations in stock returns (G17) | Changes in intertemporal portfolio and consumption choices (D15) |
| Time-varying expected returns on stocks (G17) | Significant positive intertemporal hedging demand for stocks (D15) |
| Higher risk aversion (D81) | Greater demand for stocks due to hedging motives (G19) |
| Increased frequency of rebalancing (E63) | Continuous-time solution approaches discrete-time solution (C32) |