Procyclical assets tend to rise in value when the economy is expanding and fall with the advent of a recession. Countercyclical assets are instead negatively correlated with the state of the economy. Despite the use of optimization methods, hedging, and ad hoc rebalancing techniques most...

Accepted wisdom, assuming capital market equilibrium and low cash returns, advises investors to hold optimal portfolios containing little cash. But credit crunches - periods of non-price credit rationing when effective cash yields are very high - happen in the real world. Because of this, it is...

I first show that taking moving averages of the term spread, the dividend yield, and the Shiller’s CAPE, significantly increases their ability to predict one month and 12-month forward equity market excess returns, and the state of the business cycle. Dividend yield, CAPE and term spread are...

Financial innovation in recent decades has expanded portfolio choice. We investigate how greater choice affects investors' savings and asset returns. We establish a choice channel by which greater portfolio choice increases investors' savings --- by enabling them to earn the aggregate risk...

Investors seek to hedge against interest rate risk by taking long or short positions on bonds ofdifferent maturities. We study changes in risk taking behavior in a low interest rateenvironment by estimating a market stochastic discount factor that is non-linear and thereforeconsistent with the...

Many monetary studies on the portfolio balance effect omit its impact to equity returns. Motivated through a simple general equilibrium model, we study how changes in the bond supply affect the overall equity market. Our model predicts that exogenous increases (decreases) in the bond supply...

This paper presents a present-biased general equilibrium model that explains many features of bond behavior. Present-biased investors increase (decrease) short-term (long-term) hedge demands compared to standard preferences. Hence, present bias drives up (down) short-term bond prices (yields)...

We provide a new portfolio decomposition formula that sheds light on the economics of portfolio choice for investors following the mean-variance (MV) criterion. We show that the number of components of a dynamic portfolio strategy can be reduced to two: the first is preference free and hedges...

We build a parsimonious international asset pricing model in which deviations of government bond yields from a fitted yield curve of a country measure the tightness of investors' capital constraints. We compute these measures at daily frequency for six major markets and use them to test the...

This paper compares the immunization performance of alternative single and multiple factor duration models, using Spanish government bond data, over 1, 2 and 3-year horizons. The aim is to assess whether the success of duration-matching strategies is primarily attributable to the particular...