Dynamic Portfolio Choice with Parameter Uncertainty and the Economic Value of Analysts' Recommendations |
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Authors: | Cvitanic Jaksa; Lazrak Ali; Martellini Lionel; Zapatero Fernando |
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Institution: | Division of Humanities and Social Sciences, California Institute of Technology |
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Abstract: | We derive a closed-form solution for the optimal portfolio ofa nonmyopic utility maximizer who has incomplete informationabout the alphas or abnormal returns of risky securities. Weshow that the hedging component induced by learning about theexpected return can be a substantial part of the demand. Usingour methodology, we perform an "ex ante" empirical exercise,which shows that the utility gains resulting from optimal allocationare substantial in general, especially for long horizons, andan "ex post" empirical exercise, which shows that analystsrecommendations are not very useful. (JEL C61, G11, G24) |
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