Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099059 | Journal of Economic Dynamics and Control | 2012 | 28 Pages |
Abstract
The recent theoretical asset allocation literature has derived optimal dynamic investment strategies in various advanced models of asset returns. But how sensitive is investor welfare to deviations from the theoretically optimal strategy? Will unsophisticated investors do almost as well as sophisticated investors? This paper develops a general theoretical framework for answering such questions and applies it to three specific models of interest rate risk, stochastic stock volatility, and mean reversion and growth/value tilts of stock portfolios. Among other things, we find that growth/value tilts are highly valuable, but the hedging of time-varying stock risk premia is less important.
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Linda Sandris Larsen, Claus Munk,