Momentum and Mean-Reversion in Strategic Asset Allocation
Author | : Ralph S. J. Koijen |
Publisher | : |
Total Pages | : 34 |
Release | : 2009 |
ISBN-10 | : OCLC:1290291282 |
ISBN-13 | : |
Rating | : 4/5 ( Downloads) |
Download or read book Momentum and Mean-Reversion in Strategic Asset Allocation written by Ralph S. J. Koijen and published by . This book was released on 2009 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: We study a dynamic asset allocation problem in which stock returns exhibit short-run momentum and long-run mean reversion. We develop a tractable continuous-time model that captures these two predictability features and derive the optimal investment strategy in closed-form. The model predicts negative hedging demands for medium-term investors, and an allocation to stocks that is non-monotonic in the investor's horizon. Momentum substantially increases the economic value of hedging time-variation in investment opportunities. These utility gains are preserved when we impose realistic borrowing and short-sales constraints and allow the investor to trade on a monthly frequency.