Jumps and Dynamic Asset Allocation |
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Authors: | Wu Liuren |
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Affiliation: | (1) Graduate School of Business, Fordham University, 113 West 60th Street, New York, NY, 10023 |
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Abstract: | This paper analyzes the optimal dynamic asset allocation problem in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical approximations are obtained, with which a thorough comparative study is performed on the impacts of jumps upon the dynamic decision. The model is then calibrated to the U.S. equity market. The comparative analysis and the calibration exercise both show that jump risk not only makes the investor's allocation more conservative overall but also makes her dynamic portfolio rebalancing less dramatic over time. |
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Keywords: | asset allocation jumps non-normality time-varying investment opportunities predictability |
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