Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model

Journal of Empirical Finance, 2012, vol. 19, issue 2, 241-253

Abstract: Within a VAR based intertemporal asset allocation model we explore the effects on return predictability and optimal asset allocation of adjusting VAR parameter estimates for small-sample bias. We apply a simple and easy-to-use analytical bias formula instead of bootstrap or Monte Carlo bias-adjustment. Regarding return predictability we show that bias-adjustment in the multivariate setup can yield very different results than in the univariate case. Furthermore, bias-correcting the VAR parameters has both quantitatively and qualitatively important effects on the optimal portfolio choice. For intermediate values of risk-aversion, the intertemporal hedging demand for bonds and stocks is heavily affected by the bias-correction. Utility calculations also show large effects of bias-adjustment, both in-sample and out-of-sample.

Keywords: Intertemporal portfolio choice; Return predictability; VAR model; Small-sample bias; Utility calculations; Out-of-sample evaluation (search for similar items in EconPapers)
JEL-codes: C32 G11 G12 (search for similar items in EconPapers)
Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (10)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0927539812000047
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Return predictability and intertemporal asset allocation: Evidence from a bias-adjusted VAR model (2008)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:19:y:2012:i:2:p:241-253

DOI: 10.1016/j.jempfin.2012.01.003

Access Statistics for this article

Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

More articles in Journal of Empirical Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().