This paper examines the ex-post performance of optimal portfolios with predictable returns, when the investor horizon ranges from one month to ten years. Due to the investor's ability to anticipate shifts from bull to bear markets, predictability involves the risk premium, volatility and...

The 2007-2008 financial crises has made it painfully obvious that markets may quickly turn illiquid.Moreover, recent experience has shown that distress and lack of active trading can jump “around”between seemingly unconnected parts of the financial system contributing to transforming...

A growing body of empirical evidence suggests that investors' behavior is not well described by the traditional paradigm of (subjective) expected utility maximization under rational expectations. A literature has arisen that models agents whose choices are consistent with models that are less...

The 2007-2008 financial crises has made it painfully obvious that markets may quickly turn illiquid. Moreover, recent experience has taught us that distress and lack of active trading can jump “around” between seemingly unconnected parts of the financial system contributing to transforming...

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...

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...

Most papers in the portfolio choice literature have examined linear predictability frameworks based on the idea that simple but flexible Vector Autoregressive (VAR) models can be expanded to produce portfolio allocations that hedge against the bull and bear dynamics typical of financial markets...

We investigate whether the favorable performance of a fairly simple multistate multivariate Markov regime switching model relative to even very complex multivariate GARCH specifications, recently reported in the literature using measures of in-sample prediction accuracy, extends to pseudo...

This paper analyzes the empirical performance of two alternative ways in which multi-factor models with time-varying risk exposures and premia may be estimated. The first method echoes the seminal two-pass approach advocated by Fama and MacBeth (1973). The second approach is based on a Bayesian...