Working Paper: NBER ID: w16255
Authors: Jessica Wachter
Abstract: This review article describes recent literature on asset allocation, covering both static and dynamic models. The article focuses on the bond--stock decision and on the implications of return predictability. In the static setting, investors are assumed to be Bayesian, and the role of various prior beliefs and specifications of the likelihood are explored. In the dynamic setting, recursive utility is assumed, and attention is paid to obtaining analytical results when possible. Results under both full and limited-information assumptions are discussed.
Keywords: Asset Allocation; Bayesian Methods; Return Predictability
JEL Codes: C11; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| dividend yield (G35) | optimal stock allocation (G11) |
| prior beliefs (D80) | investment decisions (G11) |
| risk aversion (D81) | optimal asset allocation (G11) |
| risk aversion + predictability of returns (D81) | allocation to risky assets (G11) |
| Bayesian estimation (C11) | perception of risk and return (G11) |
| estimation risk (C13) | conservative allocations (D61) |
| high dividend yield (G35) | increased stock allocation (G11) |
| upward shift in mean expected return (G40) | increased stock allocation (G11) |