Dynamic Asset Allocation with Stochastic Income and Interest Rates PDF Download
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Author: Claus Munk
Publisher:
ISBN:
Category :
Languages : en
Pages : 63
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Book Description
We investigate the optimal investment and consumption choice of individual investors with uncertain future labor income operating in a financial market with stochastic interest rates. Since the present value of the individual's future income is a main determinant of the optimal behavior and this present value depends heavily on the interest rate dynamics, the joint stochastics of income and interest rates will have consequences beyond the separate effects of stochastic income and stochastic interest rates. We study both the case where income risk is spanned and there are no portfolio constraints and the case with non-spanned income risk and a constraint ruling out borrowing against future income. For the spanned, unconstrained problem we study a special case in which we obtain closed-form expressions for the optimal policies. For the unspanned, constrained problem we implement a numerical solution technique and compare the solutions to the spanned, unconstrained problem. We also allow for typical life-cycle variations in labor income.
Author: Claus Munk
Publisher:
ISBN:
Category :
Languages : en
Pages : 63
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Book Description
We investigate the optimal investment and consumption choice of individual investors with uncertain future labor income operating in a financial market with stochastic interest rates. Since the present value of the individual's future income is a main determinant of the optimal behavior and this present value depends heavily on the interest rate dynamics, the joint stochastics of income and interest rates will have consequences beyond the separate effects of stochastic income and stochastic interest rates. We study both the case where income risk is spanned and there are no portfolio constraints and the case with non-spanned income risk and a constraint ruling out borrowing against future income. For the spanned, unconstrained problem we study a special case in which we obtain closed-form expressions for the optimal policies. For the unspanned, constrained problem we implement a numerical solution technique and compare the solutions to the spanned, unconstrained problem. We also allow for typical life-cycle variations in labor income.
Author: Donatien Hainaut
Publisher:
ISBN:
Category :
Languages : en
Pages : 20
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Book Description
This paper addresses the problem of dynamic asset allocation under a bounded shortfall risk in a market composed of three assets: cash, stocks and a zero coupon bond. The dynamics of the instantaneous short rates is driven by a Hull and White model. In this setting, we determine and compare optimal investment strategies maximizing the CRRA utility of terminal wealth with and without value at risk constraint.
Author: Carl Chiarella
Publisher: Springer
ISBN: 3662492296
Category : Business & Economics
Languages : en
Pages : 203
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Book Description
This book examines sustainable wealth formation and dynamic decision-making. The global economy experienced a veritable meltdown of asset markets in the years 2007-9, where many funds were overexposed to risky returns and suffered considerable losses. On the other hand, the long-term upswing in the stock market since 2010 has led to asset price booms and some new, but also uneven, wealth formation. In this book a broader set of constraints and guidelines for asset management and wealth accumulation is developed. The authors investigate how wealth formation and the proper management of financial funds can help to adequately buffer income risk and obtain sufficient risk-free income at a later stage of life, while also being socially and environmentally sustainable. The book explores behavioral and institutional rules for decision-making that reflect such constraints and guidelines, without necessarily being optimal in the narrow sense. The authors explain the need for such a dynamic decision-making and dynamic re-balancing of portfolios, by putting forward dynamic programming as an approach to dynamic decision-making that can allow sustainable wealth accumulation and dynamic asset allocation to be successfully integrated. This book provides a clear and comprehensive treatment of asset accumulation and dynamic portfolio models with an emphasis on long term and sustainable wealth formation. An important concern in public debate is the sustainability of our economy and this book employs cutting edge quantitative techniques and models to highlight important facts that cannot be disputed under any reasonable assumptions. It has the potential to become a standard reference for both academic researchers and quantitatively trained practitioners. Eckhard Platen, Professor of Quantitative Finance, University of Technology Sydney, Australia This book should be read by both academics and practitioners alike. The former will find intellectually rigorous discussions and innovative solutions. The latter may find a few of the concepts a bit challenging. Yet, theory and technology are there to help simplify the work of those who worry about what time it is rather than how to make a watch--- but they do need a watch. Jean Brunel, Founder of Brunel Associates and Editor of The Journal of Wealth Management
Author: David A. Hammer
Publisher:
ISBN:
Category : Business & Economics
Languages : en
Pages : 362
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Book Description
Includes an examination of traditional asset allocation methods, why they do and do not work, and which elements can be used in overseeing the professional's own portfolio. In addition, the author introduces his own proven method of portfolio management and asset allocation strategies--the ``7-Step System''--using simple statistical techniques to forecast stock, bond, commodity, and money market returns. Free of complex mathematics, charts, graphs, and technical jargon, this is a highly readable guide to getting the most from today's sophisticated investment techniques.
Author: Julian Hölzermann
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper studies dynamic asset allocation with interest rate risk and several sources of ambiguity. The market consists of a risk-free asset, a zero-coupon bond (both determined by a Vasicek model), and a stock. There is ambiguity about the risk premia, the volatilities, and the correlation. The investor's preferences display both risk aversion and ambiguity aversion. The optimal investment problem can be solved in closed-form under typical market conditions. The solution shows that the investor does not hedge ambiguity but only risk, while the ambiguity only affects the speculative motives of the investor. An implementation of the optimal investment strategy shows the impact of the different sources of ambiguity. Ambiguity aversion helps to tame the highly leveraged portfolios neglecting ambiguity and leads to strategies that are more in line with popular investment advice. The solution method for the optimal investment problem is based on an extension of the martingale optimality principle.
Author: Alexis Collomb
Publisher:
ISBN:
Category : Asset allocation
Languages : en
Pages : 234
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Book Description
Author: A. Berkelaar
Publisher: Springer
ISBN: 0230251293
Category : Political Science
Languages : en
Pages : 401
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Book Description
This edited volume contains essential readings for financial analysts and market practitioners working at Central Banks and Sovereign Wealth Funds. It presents the reader with state-of-the-art methods that are directly implementable, and industry 'best-practices' as followed by leading institutions in their field.
Author: Linda Sandris Larsen
Publisher:
ISBN:
Category :
Languages : en
Pages : 62
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Book Description
The recent theoretical asset allocation literature has derived optimal dynamic investment strategies in various advanced models of asset returns. But how sensitive is investor welfare to deviations from the theoretically optimal strategy? Will unsophisticated investors do almost as well as sophisticated investors? This paper develops a general theoretical framework for answering such questions and applies it to three specific models of interest rate risk, stochastic stock volatility, and mean reversion and growth/value tilts of stock portfolios. Among other things, we find that growth/value tilts are highly valuable, but the hedging of time-varying stock risk premia is less important.
Author: Adam Butler
Publisher: John Wiley & Sons
ISBN: 1119220394
Category : Business & Economics
Languages : en
Pages : 244
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Book Description
Build an agile, responsive portfolio with a new approach to global asset allocation Adaptive Asset Allocation is a no-nonsense how-to guide for dynamic portfolio management. Written by the team behind Gestaltu.com, this book walks you through a uniquely objective and unbiased investment philosophy and provides clear guidelines for execution. From foundational concepts and timing to forecasting and portfolio optimization, this book shares insightful perspective on portfolio adaptation that can improve any investment strategy. Accessible explanations of both classical and contemporary research support the methodologies presented, bolstered by the authors' own capstone case study showing the direct impact of this approach on the individual investor. Financial advisors are competing in an increasingly commoditized environment, with the added burden of two substantial bear markets in the last 15 years. This book presents a framework that addresses the major challenges both advisors and investors face, emphasizing the importance of an agile, globally-diversified portfolio. Drill down to the most important concepts in wealth management Optimize portfolio performance with careful timing of savings and withdrawals Forecast returns 80% more accurately than assuming long-term averages Adopt an investment framework for stability, growth, and maximum income An optimized portfolio must be structured in a way that allows quick response to changes in asset class risks and relationships, and the flexibility to continually adapt to market changes. To execute such an ambitious strategy, it is essential to have a strong grasp of foundational wealth management concepts, a reliable system of forecasting, and a clear understanding of the merits of individual investment methods. Adaptive Asset Allocation provides critical background information alongside a streamlined framework for improving portfolio performance.
Author: John Y. Campbell
Publisher: OUP Oxford
ISBN: 019160691X
Category : Business & Economics
Languages : en
Pages : 272
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Book Description
Academic finance has had a remarkable impact on many financial services. Yet long-term investors have received curiously little guidance from academic financial economists. Mean-variance analysis, developed almost fifty years ago, has provided a basic paradigm for portfolio choice. This approach usefully emphasizes the ability of diversification to reduce risk, but it ignores several critically important factors. Most notably, the analysis is static; it assumes that investors care only about risks to wealth one period ahead. However, many investors—-both individuals and institutions such as charitable foundations or universities—-seek to finance a stream of consumption over a long lifetime. In addition, mean-variance analysis treats financial wealth in isolation from income. Long-term investors typically receive a stream of income and use it, along with financial wealth, to support their consumption. At the theoretical level, it is well understood that the solution to a long-term portfolio choice problem can be very different from the solution to a short-term problem. Long-term investors care about intertemporal shocks to investment opportunities and labor income as well as shocks to wealth itself, and they may use financial assets to hedge their intertemporal risks. This should be important in practice because there is a great deal of empirical evidence that investment opportunities—-both interest rates and risk premia on bonds and stocks—-vary through time. Yet this insight has had little influence on investment practice because it is hard to solve for optimal portfolios in intertemporal models. This book seeks to develop the intertemporal approach into an empirical paradigm that can compete with the standard mean-variance analysis. The book shows that long-term inflation-indexed bonds are the riskless asset for long-term investors, it explains the conditions under which stocks are safer assets for long-term than for short-term investors, and it shows how labor income influences portfolio choice. These results shed new light on the rules of thumb used by financial planners. The book explains recent advances in both analytical and numerical methods, and shows how they can be used to understand the portfolio choice problems of long-term investors.
