Long Horizon Predictability: An Asset Allocation Perspective.

43 Pages Posted: 7 May 2014 Last revised: 6 May 2018

See all articles by Abraham Lioui

Abraham Lioui

EDHEC Business School

Patrice Poncet

ESSEC Business School; Universite Paris I Pantheon Sorbonne

Date Written: April 30, 2018

Abstract

We analyze the effects of asset return predictability at various horizons on an individual's portfolio strategy and welfare gains as measured by a certainty equivalent return rate, for long term investors. We use a method to account for long horizon predictability that does not make violence to the data, and two alternative OLS procedures that allow investors to capture the differential information contained in various period returns. More specifically, our second procedure exploits the information present in the term structure of "forward" equity risk premia. We show that, adopting this procedure, the investor's welfare gain may be substantial relative to that obtained from using short horizon predictability only. Consequently, investors are better off by simultaneously using information in short and long horizon returns.

Keywords: dynamic portfolio decision, predictive regression, long horizon predictability, GMM estimation, inter-temporal hedging, continuous time

JEL Classification: G14

Suggested Citation

Lioui, Abraham and Poncet, Patrice, Long Horizon Predictability: An Asset Allocation Perspective. (April 30, 2018). Available at SSRN: https://ssrn.com/abstract=2433440 or http://dx.doi.org/10.2139/ssrn.2433440

Abraham Lioui (Contact Author)

EDHEC Business School ( email )

France

Patrice Poncet

ESSEC Business School ( email )

Avenue Bernard Hirsch
BP 105 Cergy Cedex, 95021
France
33 1 3443 3000 (Phone)
33 1 3443 3001 (Fax)

Universite Paris I Pantheon Sorbonne ( email )

Finance Department, UFR 06
17 rue de la Sorbonne
75005 Paris
France
33 1 40 46 2783 (Phone)
33 1 40 46 33 66 (Fax)

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