Is the Stock Market Safer for Long‐Term Investors?

John Y. Campbell and Luis M. Viceira

in Strategic Asset Allocation

Published in print January 2002 | ISBN: 9780198296942
Published online November 2003 | e-ISBN: 9780191596049 | DOI:

Series: Clarendon Lectures in Economics

 Is the Stock Market Safer for Long‐Term Investors?

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Explores optimal investment strategies when both riskless interest rates and risk premia change over time in ways that can be described by a vector autoregressive (VAR) model. In this situation, a long‐term investor with constant risk aversion should both exploit and hedge against variations in investment opportunities. As in Ch. 3, a conservative long‐term investor should hedge real interest rate risk by holding long‐term inflation‐indexed bonds, or nominal bonds if inflation risk is low. In addition, the investor should respond to mean‐reverting stock returns by increasing the average allocation to equities. The strategic equity allocation also involves gradual changes in asset allocation over time, since the state variables that predict excess returns are generally slow‐moving.

Keywords: asset allocation; bonds; equity premium; interest rates; market timing; mean reversion; predictability of returns; risk premium; vector autoregression

Chapter.  11489 words.  Illustrated.

Subjects: Financial Markets

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