Predictable returns and asset allocation: Should a skeptical investor time the market?
We investigate optimal portfolio choice for an investor who is skeptical about the degree to which excess returns are predictable. Skepticism is modeled as an informative prior over the R 2 of the predictive regression. We find that the evidence is sufficient to convince even an investor with a high...
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| Veröffentlicht in: | Journal of econometrics 2009-02, Vol.148 (2), p.162-178 |
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| container_end_page | 178 |
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| container_title | Journal of econometrics |
| container_volume | 148 |
| creator | Wachter, Jessica A. Warusawitharana, Missaka |
| description | We investigate optimal portfolio choice for an investor who is skeptical about the degree to which excess returns are predictable. Skepticism is modeled as an informative prior over the
R
2
of the predictive regression. We find that the evidence is sufficient to convince even an investor with a highly skeptical prior to vary his portfolio on the basis of the dividend-price ratio and the yield spread. The resulting weights are less volatile and deliver superior out-of-sample performance as compared to the weights implied by an entirely model-based or data-based view. |
| doi_str_mv | 10.1016/j.jeconom.2008.10.009 |
| format | Article |
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R
2
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R
2
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R
2
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| ispartof | Journal of econometrics, 2009-02, Vol.148 (2), p.162-178 |
| issn | 0304-4076 1872-6895 |
| language | eng |
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| source | Elsevier ScienceDirect Journals Complete - AutoHoldings; RePEc |
| subjects | Applications Asset allocation Asset pricing Economic models Exact sciences and technology Financial engineering Insurance, economics, finance Investment planning Linear inference, regression Market timing Mathematics Portfolio investments Portfolio management Probability and statistics Probability theory and stochastic processes Rates of return Regression analysis Sciences and techniques of general use Special processes (renewal theory, markov renewal processes, semi-markov processes, statistical mechanics type models, applications) Statistics Studies |
| title | Predictable returns and asset allocation: Should a skeptical investor time the market? |
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