Stochastic Interest Rates and the Bond-Stock Mix

Xia , Yihong; Brennan, Michael J.

doi:10.2139/ssrn.275837

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Stochastic Interest Rates and the Bond-Stock Mix

14 Pages Posted: 2 Jun 2001

See all articles by Yihong Xia

Yihong Xia

University of California, Los Angeles (Deceased)

Michael J. Brennan

University of California, Los Angeles (UCLA) - Finance Area

There are 2 versions of this paper

Abstract

The optimal bond-stock mix is examined in light of an apparent inconsistency between the Tobin Separation Theorem and the advice of popular investment advisors which has been pointed out by Canner et al. (1997). It is shown that the apparent inconsistency is largely explicable in terms of the hedging demands of optimising long-term investors in an environment in which the investment opportunity set is subject to stochastic shocks. The analysis points to the importance of considering investors' time horizons in analyzing optimal portfolio policies.

Keywords: dynamic portfolio policy, hedging, asset allocation puzzle

JEL Classification: G0, G1, G2

Suggested Citation: Suggested Citation

Xia, Yihong and Brennan, Michael John, Stochastic Interest Rates and the Bond-Stock Mix. Available at SSRN: https://ssrn.com/abstract=275837 or http://dx.doi.org/10.2139/ssrn.275837