TY  - JOUR
AU  - Ait-Sahalia,Yacine
AU  - Brandt,Michael W.
TI  - Variable Selection for Portfolio Choice
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8127
PY  - 2001
Y2  - February 2001
UR  - http://www.nber.org/papers/w8127
L1  - http://www.nber.org/papers/w8127.pdf
N1  - Author contact info:
Yacine Ait-Sahalia
Department of Economics
Fisher Hall
Princeton University
Princeton, NJ 08544-1021
Tel: 609/258-4015
Fax: 609/258-0719
E-Mail: yacine@princeton.edu

Michael W. Brandt
Fuqua School of Business
Duke University
One Towerview Drive
Durham, NC  27708
Tel: 919/660-1948
Fax: 919/660-8038
E-Mail: mbrandt@duke.edu
AB  - We study asset allocation when the conditional moments of returns are partly predictable.  Rather than first model the return distribution and subsequently characterize the portfolio choice, we determine directly the dependence of the optimal portfolio weights on the predictive variables.  We combine the predictors into a single index that best captures time-variations in investment opportunities.  This index helps  investors determine which economic variables they should track and, more importantly, in what combination. We consider investors with both expected utility (mean-variance and CRRA) and non-expected utility (ambiguity aversion and prospect theory) objectives and characterize their market-timing, horizon effects, and hedging demands.
ER  -