| Publications [#48049] of Dana Kiku
Working Papers
- with Ravi Bansal, Long-Run Asset Allocation
(June, 2006)
(last updated on 2006/07/17)
Abstract:
In this paper we show that the economic restriction of cointegration
between portfolio cash flow levels and consumption level has
important implications for return dynamics and portfolio choice.
When cash flows and consumption are cointegrated, the cointegration
error forecasts long-horizon dividend growth rates and returns, and
alters the variance-covariance of returns by horizon. We show that
the optimal asset mix, based on the EC-VAR specification with the
cointegration restriction imposed, can be quite different relative
to a traditional VAR that ignores the cointegration restriction. We
develop and implement methods to account for parameter uncertainty
in the EC-VAR setup and highlight the importance of the
error-correction channel for optimal asset allocation at short and
long investment horizons.
|