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Publications [#48049] of Dana Kiku

Working Papers

  1. with Ravi Bansal, Long-Run Asset Allocation (June, 2006)
    (last updated on 2006/07/17)


    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.

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