NBER Publications by George Chacko
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Working Papers and Chapters and Reporter Articles
March 2003  Strategic Asset Allocation in a ContinuousTime VAR Model
with John Y. Campbell, Jorge Rodriguez, Luis M. Viciera: w9547
This note derives an approximate solution to a continuoustime intertemporal portfolio and consumption choice problem. The problem is the continuoustime equivalent of the discretetime 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 note also shows how to obtain continuoustime parameters that are consistent with discretetime econometric estimates. The continuoustime solution is numerically close to that of Campbell and Viceira and has the property that conservative longterm investors have a large positive intertemporal hedging demand for stocks. Published: Campbell, John Y. & Chacko, George & Rodriguez, Jorge & Viceira, Luis M., 2004. "Strategic asset allocation in a continuoustime VAR model," Journal of Economic Dynamics and Control, Elsevier, vol. 28(11), pages 21952214, October. citation courtesy of

June 2000  Cephalon, Inc. Taking Risk Management Theory Seriously
with Peter Tufano, Geoffrey Verter: w7748
We study a firm that justifies its novel use of equity derivatives as a cashflow hedging strategy. Our purpose is to understand the challenge of translating risk management theory into managerial action. Cephalon Inc., a biotech firm, bought a large block of call options on its own stock. If the FDA approved the firm's new drug, the firm would have large cash needs, which the options were designed to meet. We analyze this stated rationale for the firm's choice, applying the cash flow hedging concepts articulated by Froot, Scharfstein and Stein (1993). In applying the theory to practice, there are lessons for both managers and theorists. Managers consider deadweight costs of financing and of risk management, whereas theory tends to ignore the latter costs. While theory is driven by c... Published: Chacko, George, Peter Tufano and Geoffrey Verter. "Cephalon, Inc. Taking Risk Management Theory Seriously," Journal of Financial Economics, 2001, v60(23,May), 449485.

October 1999  Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets
with Luis M. Viceira: w7377
This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the DuffieEpstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly with the investor's coefficient of relative risk aversion, but only slightly with her elasticity of intertemporal substitution; by contrast, optimal consumption relative to wealth depends on both preference parameters. This paper also shows that stochastic variation in volatility produces an optimal intertemporal hedging demand for stocks which is negative when changes in volatility are instantaneously negatively correlated with excess stock returns and investors have coefficients of relative risk a... Published: George Chacko & Luis M. Viceira, 2005. "Dynamic Consumption and Portfolio Choice with Stochastic Volatility in Incomplete Markets," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 18(4), pages 13691402. citation courtesy of

May 1997  Average Interest
with Sanjiv Ranjan Das: w6045
We develop analytic pricing models for options on averages by means of a statespace expansion method. These models augment the class of Asian options to markets where the underlying traded variable follows a meanreverting process. The approach builds from the digital Asian option on the average and enables pricing of standard Asian calls and puts, caps and floors, as well as other exotica. The models may be used (i) to hedge long period interest rate risk cheaply, (ii) to hedge event risk (regime based risk), (iii) to manage long term foreign exchange risk by hedging through the average interest differential, (iv) managing credit risk exposures, and (v) for pricing specialized options like rangeAsians. The techniques in the paper provide several advantages over existing numerical app... 
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