TY - JOUR AU - Liu, Jun AU - Longstaff, Francis A AU - Pan, Jun TI - Dynamic Asset Allocation With Event Risk JF - National Bureau of Economic Research Working Paper Series VL - No. 9103 PY - 2002 Y2 - August 2002 DO - 10.3386/w9103 UR - http://www.nber.org/papers/w9103 L1 - http://www.nber.org/papers/w9103.pdf N1 - Author contact info: Jun Liu Rady School of Management UCSD Pepper Canyon Hall Room 320 9500 Gilman Dr MC 0093 La Jolla CA 92093 Tel: 310/825-4083 E-Mail: junliu@ucsd.edu Francis Longstaff UCLA Anderson Graduate School of Management 110 Westwood Plaza, Box 951481 Los Angeles, CA 90095-1481 Tel: 310/825-2218 Fax: 310/206-5455 E-Mail: francis.longstaff@anderson.ucla.edu Jun Pan MIT Sloan School of Management 100 Main Street, E62-624 Cambridge, MA 02142 Tel: 617/253-3083 Fax: 617/258-6855 E-Mail: junpan@mit.edu AB - Major events often trigger abrupt changes in stock prices and volatility. We study the implications of jumps in prices and volatility on investment strategies. Using the event-risk framework of Duffie, Pan, and Singleton (2000), we provide analytical solutions to the optimal portfolio problem. Event risk dramatically affects the optimal strategy. An investor facing event risk is less willing to take leveraged or short positions. The investor acts as if some portion of his wealth may become illiquid and the optimal strategy blends both dynamic and buy-and-hold strategies. Jumps in prices and volatility both have important effects. ER -