Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations

We derive a closed-form solution for the optimal portfolio of a nonmyopic utility maximizer who has incomplete information about the alphas or abnormal returns of risky securities. We show that the hedging component induced by learning about the expected return can be a substantial part of the deman...

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Veröffentlicht in:The Review of financial studies 2006-12, Vol.19 (4), p.1113-1156
Hauptverfasser: Cvitanić, Jakša, Ali Lazrak, Lionel Martellini, Zapatero, Fernando
Format: Artikel
Sprache:eng
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Zusammenfassung:We derive a closed-form solution for the optimal portfolio of a nonmyopic utility maximizer who has incomplete information about the alphas or abnormal returns of risky securities. We show that the hedging component induced by learning about the expected return can be a substantial part of the demand. Using our methodology, we perform an "ex ante" empirical exercise, which shows that the utility gains resulting from optimal allocation are substantial in general, especially for long horizons, and an "ex post" empirical exercise, which shows that analysts' recommendations are not very useful.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhj039