We study a dynamic asset allocation problem in which stock returns exhibit short-run momentum and long-run mean reversion. We develop a tractable continuous-time model that captures these two predictability features and derive the optimal investment strategy in closed form. The model predicts...

We discuss business cycle effects on the management of a trust fund set up to provide regular income on a continuing basis. Fund managers must find a balance between short-term and long-term variability of income. In our model the managers know that the expected return is mean-reverting, but...

This paper introduces an endowment model that can be interpreted as a continuous time, continuous space generalization of Mehra and Prescott (1985) in which the state variable is a weighted average of past growth. The model is tractable enough to provide exact analytical solutions for term and...

This paper models dependence with switching - parameter copulas to study financial contagion. Using daily returns from five East Asian stock indices during the Asian crisis, and from four Latin American stock indices during the Mexican crisis, it finds evidence of changing dependence during...

In a general equilibrium setting, a temporary component in consumption introduces a wedge between the volatility of equity returns and the volatility of consumption growth. This paper explores the asset pricing consequences of this property in a model in which consumption is the sum of a...