CATALOGO DEI PRODOTTI DELLA RICERCA
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EnglishWe study a dynamic asset allocation problem in which stock returns exhibit short-run momentum and long-run mean reversion. We develop a tractable continuous-time model that captures these two predictability features and derive the optimal investment strategy in closed-form. The model predicts negative hedging demands for medium-term investors, and an allocation to stocks that is non-monotonic in the investor’s horizon. Momentum substantially increases the economic value of hedging time-variation in investment opportunities. These utility gains are preserved when we impose realistic borrowing and short-sales constraints and allow the investor to trade on a monthly frequency.
| Titolo: | Momentum and Mean-Reversion in Strategic Asset Allocation |
| Autori: | |
| Data di pubblicazione: | Being printed |
| Rivista: | |
| Abstract: | We study a dynamic asset allocation problem in which stock returns exhibit short-run momentum and long-run mean reversion. We develop a tractable continuous-time model that captures these two predictability features and derive the optimal investment strategy in closed-form. The model predicts negative hedging demands for medium-term investors, and an allocation to stocks that is non-monotonic in the investor’s horizon. Momentum substantially increases the economic value of hedging time-variation in investment opportunities. These utility gains are preserved when we impose realistic borrowing and short-sales constraints and allow the investor to trade on a monthly frequency. |
| Handle: | http://hdl.handle.net/11562/327110 |
| Appare nelle tipologie: | 01.01 Articolo in Rivista |
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