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## Dynamic consumption and portfolio choice with stochastic volatility in incomplete markets (2003)

Citations: | 134 - 13 self |

### Citations

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Citation Context ...owing dynamics for instantaneous precision: dyt = κ(θ − yt)dt + σ √ ytdWy. (2) Precision follows a mean-reverting, square-root process with reversion parameter κ> 0, withE[yt] =θ and Var(yt) =σ2θ/2κ (=-=Cox, Ingersoll, and Ross, 1985-=-). In order to satisfy standard integrability conditions, we assume that 2κθ > σ2 . The stochastic process for precision implies a mean-reverting process for the instantaneous volatility vt ≡ 1/yt. Ap... |

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Citation Context ...of these roots ensures that the limit of the solution as γ → 1 equals the well-known solution in the special case of log utility (γ = ψ =1), for which A = B =0,andthevalue function is simply log(Xt) (=-=Merton, 1969-=-, 1971, 1973). Convergence to the known solution is obtained by selecting the root associated with the positive root of the discriminant of the quadratic equation (15) when γ>1, and the negative root ... |

660 | Why Does Stock Market Volatility Change Over Time - Schwert - 1989 |

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Citation Context ...l substitution of consumption. This assumption is difficult to justify on empirical grounds, because the existing estimates of this elasticity from aggregate and disaggregate data are well below one (=-=Hall 1988-=-, Campbell and Mankiw 1989, Campbell 1999, Vissin-Jorgensen 2002). However, our calibration exercise suggests that this assumption is not particularly constraining if one is interested only in dynamic... |

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Citation Context ...a (2002) has found that 1intertemporal hedging is quantitatively important in light of the observed predictable variation in both interest rates and equity premia in the US (Balduzzi and Lynch 1997, =-=Barberis 2000-=-, Brandt 1998, Brennan, Schwartz and Lagnado 1996, 1997, Campbell and Viceira 1999, 2001, Campbell, Chan and Viceira 2002). This paper explores systematically optimal portfolio choice with volatility ... |

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Citation Context ...k return volatility is serially correlated, and shocks to volatility are negatively correlated with unexpected stock returns. Changes in volatility are persistent (French, Schwert and Stambaugh 1987, =-=Campbell and Hentschel 1992-=-). Large negative stock returns tend to be associated with increases in volatility that persist over long periods of time. Stock return volatility appears to be correlated across markets over the worl... |

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341 |
Consumption and Portfolio Decisions When Expected Returns Are Time Varying.
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(Show Context)
Citation Context ...rtant in light of the observed predictable variation in both interest rates and equity premia in the US (Balduzzi and Lynch 1997, Barberis 2000, Brandt 1998, Brennan, Schwartz and Lagnado 1996, 1997, =-=Campbell and Viceira 1999-=-, 2001, Campbell, Chan and Viceira 2002). This paper explores systematically optimal portfolio choice with volatility risk in a continuous-time setting. We consider the optimal consumption and investm... |

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287 | Market Volatility. - Shiller - 1989 |

284 | Strategic Asset Allocation: Portfolio Choice for Long-Term Investors, - Campbell, Viceira - 2002 |

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Citation Context ...rns tend to be associated with increases in volatility that persist over long periods of time. Stock return volatility appears to be correlated across markets over the world (Engle, Ito and Lin 1990, =-=Ang and Bekaert 2002-=-). While there is an abundant literature exploring the pricing of assets when volatility is time varying, there is not much research exploring optimal dynamic portfolio choice with volatility risk. Th... |

230 | Pricing Foreign Currency Options with Stochastic Volatility,” - Melino, Turnbull - 1990 |

207 | ARCH modelling in finance. - Bollerslev, RY, et al. - 1992 |

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190 | Dynamic nonmyopic portfolio behavior,”
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Citation Context ...choice problems with time-varying investment opportunities. This research has provided solutions in settings where markets are incomplete, but constraining utility to be defined over terminal wealth (=-=Kim and Omberg 1996-=-, Wachter 2002); and in settings where investors have utility over intermediate consumption, but constraining markets to be complete (Brennan and Xia 2001, Wachter 2002, Schroder and Skiadas 1999, and... |

173 | Meteor Showers or Heat Waves? Heteroskedastic Intraday Volatility in the Foreign Exchange Market, - Engle, Ito, et al. - 1990 |

165 | Estimating portfolio and consumption choice: A conditional Euler equations approach
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Citation Context ...und that intertemporal hedging is quantitatively important in light of the observed predictable variation in both interest rates and equity premia in the US (Balduzzi and Lynch 1997, 1 Barberis 2000, =-=Brandt 1999-=-, Brennan, Schwartz and Lagnado 1996, 1997, Campbell and Viceira 1999, 2001, Campbell, Chan and Viceira 2003). This paper explores systematically optimal portfolio choice with volatility risk in a con... |

165 | Portfolio selection in stochastic environments, - Liu - 2007 |

152 | A multivariate model of strategic asset allocation, - Campbell, Chan, et al. - 2003 |

149 | Transaction costs and predictability: Some utility cost calculations,
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Citation Context ...ed in Campbell and Viceira (2002) has found that 1intertemporal hedging is quantitatively important in light of the observed predictable variation in both interest rates and equity premia in the US (=-=Balduzzi and Lynch 1997-=-, Barberis 2000, Brandt 1998, Brennan, Schwartz and Lagnado 1996, 1997, Campbell and Viceira 1999, 2001, Campbell, Chan and Viceira 2002). This paper explores systematically optimal portfolio choice w... |

135 | Portfolio and consumption decisions under mean-reverting returns: an exact solution for complete markets,
- Wachter
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(Show Context)
Citation Context ...time-varying investment opportunities. This research has provided solutions in settings where markets are incomplete, but constraining utility to be defined over terminal wealth (Kim and Omberg 1996, =-=Wachter 2002-=-); and in settings where investors have utility over intermediate consumption, but constraining markets to be complete (Brennan and Xia 2001, Wachter 2000, Schroder and Skiadas 1999, and Fisher and Gi... |

135 | Continuous Time Finance. - Merton - 1990 |

127 | Estimation of Affine Asset Pricing Models Using the Empirical Characteristic Function - SINGLETON - 2001 |

125 | Estimation of stochastic volatility models with diagnostics. - Gallant, Hsieh, et al. - 1997 |

117 | Variable selection for portfolio choice - Aït-Sahalia, Brandt - 2001 |

115 | Stochastic volatility in asset prices: Estimation with simulated maximum likelihood, - Danielsson - 1994 |

90 | The Role of Learning in Dynamic Portfolio Decisions, - Brennan - 1998 |

87 | Optimal consumption and portfolio selection with stochastic differential utility
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(Show Context)
Citation Context ...al wealth (Kim and Omberg 1996, Wachter 2002); and in settings where investors have utility over intermediate consumption, but constraining markets to be complete (Brennan and Xia 2001, Wachter 2000, =-=Schroder and Skiadas 1999-=-, and Fisher and Gilles 1998). This paper provides an exact solution for the case of utility defined over intermediate consumption which does not require assuming that markets are complete. This exact... |

84 | Spectral GMM Estimation of ContinuousTime Processes, Working Paper, Graduate School of Business,
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(Show Context)
Citation Context ...etected in high frequency data by Andersen, Benzoni and Lund (1998). These results suggest that there might be high frequency and low frequency (or long-memory) components in stock market volatility (=-=Chacko and Viceira, 2003-=-). By construction, the single component model (1)-(2) cannot capture these components simultaneously. On the other hand, it is very difficult to find analytical solutions for a model with multiple co... |

56 | Predictability and transaction costs: The impact on rebalancing rules and behavior - Lynch, Balduzzi - 2000 |

54 |
International asset allocation with time-varying correlations,
- Ang, Bekaert
- 1999
(Show Context)
Citation Context ...rns tend to be associated with increases in volatility that persist over long periods of time. Stock return volatility appears to be correlated across markets over the world (Engle, Ito and Lin 1990, =-=Ang and Bekaert 1999-=-). While there is an abundant literature exploring the pricing of assets when volatility is time varying, there is not much research exploring optimal dynamic portfolio choice with volatility risk. Th... |

22 | Stock Market Mean Reversion and the Optimal Equity Allocation of a Long Lived Investor,” manuscript, - Campbell, Cocco, et al. - 2001 |

22 | The Use of Treasury Bill Futures in Strategic Asset Allocation Programs - Brennan, Schwartz, et al. - 1999 |

20 | Interest Rates: Reinterpreting the Time Series Evidence - Mankiw, “Consumption - 1989 |

19 | A comparison of numerical and analytical approximate solutions to an intertemporal consumption choice problem - Campbell, Koo - 1997 |

15 | Efficient estimation of the continuous time stochastic volatility model via the empirical characteristic function - Jiang, Knight - 2002 |

7 | Consumption and Asset Prices with Recursive Preferences
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Citation Context ... Wachter 2002); and in settings where investors have utility over intermediate consumption, but constraining markets to be complete (Brennan and Xia 2001, Wachter 2000, Schroder and Skiadas 1999, and =-=Fisher and Gilles 1998-=-). This paper provides an exact solution for the case of utility defined over intermediate consumption which does not require assuming that markets are complete. This exact solution requires though th... |

4 | On organisational learning - Michael - 2001 |

4 | The Use of Treasury Bill Futures - Brennan, Schwartz, et al. - 1996 |

3 | Merton : Continuous Time Finance - Robert - 1990 |

2 |
Limited asset market participation and the elasticity of intertemporal substitution
- Vissin-Jorgensen
- 2002
(Show Context)
Citation Context ...fficult to justify on empirical grounds, because the existing estimates of this elasticity from aggregate and disaggregate data are well below one (Hall 1988, Campbell and Mankiw 1989, Campbell 1999, =-=Vissin-Jorgensen 2001-=-). However, our calibration exercise suggests that this assumption is not particularly constraining if one is interested only in dynamic portfolio choice. This exercise shows that optimal portfolio al... |

2 | Have Individual Stocks BecomeMore Volatile? An Empirical Exploration of Idiosyncratic Risk - Campbell, Lettau, et al. - 2001 |

2 |
Consumption and asset prices with homothetic recursive preferences, Working paper
- Fisher, Gilles
- 1999
(Show Context)
Citation Context ... Wachter 2002); and in settings where investors have utility over intermediate consumption, but constraining markets to be complete (Brennan and Xia 2001, Wachter 2002, Schroder and Skiadas 1999, and =-=Fisher and Gilles 1999-=-). This paper provides an exact solution for the case of utility defined over intermediate consumption which does not require assuming that markets are complete. This exact solution requires though th... |

2 | 2002, “Estimation of Continuous Time Stochastic Processes via the Empirical Characteristic Function - Jiang, Knight |

1 | Dynamic Portfolio Choice and Risk Aversion,” unpublished paper - Liu - 2001 |