Dynamic Asset Allocation With Event Risk, Transaction Costs and Predictable Returns

Download or read book Dynamic Asset Allocation With Event Risk, Transaction Costs and Predictable Returns written by Jean-Guy Simonato and published by . This book was released on 2018 with total page 36 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the interplay between event risk, transaction costs and predictability on the dynamic asset allocation of an investor with discrete trading opportunities. The model is calibrated to the U.S. stock market and a Gauss-Hermite quadrature approach is used to solve the investor's dynamic optimization problem. Numerical scenarios are examined to show the impact of event risk on asset allocations, hedging demands, no-trading regions, and certainty equivalent returns. It is found that event risk shrinks hedging demand. Neglecting event risk can also lead to sizeable certainty equivalent return losses.