This paper examines a continuous-time intertemporal consumption and portfoliochoice problem for an investor with Duffie and Epstein (1992a)’s recursive preferenceswho worries about model misspecification (model uncertainty) and wants toseek robust decision rules. The expected excess return of...

I examine determinants of stochastic relative risk aversion in conditional asset pricing models. I first develop time-series specification tests with nonlinear state-space models with heteroskedasticity based on Merton (1973)'s ICAPM. I then established the following facts. First, the surplus...

We use multivariate regime switching vector autoregressive models to characterize the time-varyinglinkages among the Irish stock market, one of the top world performers of the 1990s, and the US andUK stock markets. We ¯nd that two regimes, characterized as bear and bull states, are required...

A growing number of studies in finance decompose multi-period buy-and-hold portfolioreturns into a series of single period returns. The method used to decomposethese returns is important because researchers use them in tests of asset pricing modelsand market efficiency and in evaluating the...

We address one interesting case — the predictability of excess US asset returns from macroeconomic factors within a flexible regime switching VAR framework — in which the presence of regimes may lead to superior forecasting performance from forecast combinations. After having documented that...

This paper studies asset allocation decisions in the presence of regime switching in asset returns. Wefind evidence that four separate regimes - characterized as crash, slow growth, bull and recovery states- are required to capture the joint distribution of stock and bond returns. Optimal asset...

We calculate optimal portfolio choices for a long-horizon, risk-averse investor who diversifies amongEuropean stocks, bonds, real estate, and cash, when excess asset returns are predictable. Simulations areperformed for scenarios involving different risk aversion levels, horizons, and...

This study explores the information content of HML and SMB by linking the Fama-French factors toshocks in the state variables which predict future investment opportunities. It shows that the HMLfactor contains information about shocks to default spread. Moreover, the Fama-French modelexplains...

Welfare gains to long-horizon investors may derive from time diversification that exploits non-zerointertemporal return correlations associated with predictable returns. Real estate may thus become moredesirable if its returns are negatively serially correlated. While it could be important for...

This paper examines a continuous-time intertemporal consumption and portfolio choice problem foran ambiguity-averse investor with multiple priors when the expected return of a risky asset isunobservable and follows a hidden Markov chain. The investor’s beliefs over investmentopportunities are...