TY  - JOUR
AU  - Campbell,John Y.
AU  - Chan,Yeung Lewis
AU  - Viceira,Luis M.
TI  - A Multivariate Model of Strategic Asset Allocation
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 8566
PY  - 2001
Y2  - October 2001
UR  - http://www.nber.org/papers/w8566
L1  - http://www.nber.org/papers/w8566.pdf
N1  - Author contact info:
John Y. Campbell
Morton L. and Carole S.
Olshan Professor of Economics
Department of Economics
Harvard University
Littauer Center 213
Cambridge, MA 02138
Tel: 617/496-6448
Fax: 617/495-7730
E-Mail: john_campbell@harvard.edu

Luis M. Viceira
George E. Bates Professor
Harvard Business School
Baker Library 367
Boston, MA 02163
Tel: 617/495-6331
Fax: 617/496-7379
E-Mail: lviceira@hbs.edu
AB  - Much recent work has documented evidence for predictability of asset returns. We show how such predictability can affect the portfolio choices of long-lived investors who value wealth not for its own sake but for the consumption their wealth can support. We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitely-lived investor with Epstein-Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in long-run annual and postwar quarterly US data suggest that the predictability of stock returns greatly increases the optimal demand for stocks. The role of nominal bonds in long-term portfolios depends on the importance of real interest rate risk relative to other sources of risk. We extend the analysis to consider long-term inflation-indexed bonds and find that these bonds greatly increase the utility of conservative investors, who should hold large positions when they are available.
ER  -