02004cam a22002537 4500001000600000003000500006005001700011008004100028100002200069245014000091260006600231490004100297500001900338520090000357530006101257538007201318538003601390690011201426700002101538710004201559830007601601856003701677856003601714w5857NBER20170323201751.0170323s1996 mau||||fs|||| 000 0 eng d1 aCampbell, John Y.10aConsumption and Portfolio Decisions When Expected Returns are Time Varyingh[electronic resource] /cJohn Y. Campbell, Luis M. Viceira. aCambridge, Mass.bNational Bureau of Economic Researchc1996.1 aNBER working paper seriesvno. w5857 aDecember 1996.3 aThis paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a long-lived investor facing time-varying investment opportunities. The investor is assumed to be infinitely-lived, to have recursive Epstein-Zin-Weil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by log-linearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose risk-aversion coefficients exceed one. aHardcopy version available to institutional subscribers. aSystem requirements: Adobe [Acrobat] Reader required for PDF files. aMode of access: World Wide Web. 7aG12 - Asset Pricing • Trading Volume • Bond Interest Rates2Journal of Economic Literature class.1 aViceira, Luis M.2 aNational Bureau of Economic Research. 0aWorking Paper Series (National Bureau of Economic Research)vno. w5857.4 uhttp://www.nber.org/papers/w585741uhttp://dx.doi.org/10.3386/w5857