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

Publikation: Working paper/Preprint Working paperForskning

  • Institut for Økonomi
We extend the VAR based intertemporal asset allocation approach from Campbell
et al. (2003) to the case where the VAR parameter estimates are adjusted for small-
sample bias. We apply the analytical bias formula from Pope (1990) using both
Campbell et al.'s dataset, and an extended dataset with quarterly data from 1952
to 2006. The results show that correcting the VAR parameters for small-sample
bias has both quantitatively and qualitatively important e¤ects on the strategic
intertemporal part of optimal portfolio choice, especially for bonds: for intermediate
values of risk-aversion, the intertemporal hedging demand for bonds - and thereby
the total demand for bonds - is strongly reduced by the bias-adjustment. We also
investigate the robustness of the results by changing the lag-length and one of the
state variables of the VAR.
UdgiverInstitut for Økonomi, Aarhus Universitet
Antal sider37
StatusUdgivet - 2008

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