Portfolio Choice with Stochastic Interest Rates and Learning About Stock Return Predictability

Download or read book Portfolio Choice with Stochastic Interest Rates and Learning About Stock Return Predictability written by Marcos Escobar and published by . This book was released on 2014 with total page 35 pages. Available in PDF, EPUB and Kindle. Book excerpt: The problem of optimal wealth allocation is solved under the assumptions that interest rates are stochastic and stock returns are predictable with observed and unobserved factors. The stock risk premium is taken to be an affine function of the predictive variables and the stock return volatility is assumed to depend on the observed factor. The latent factor is estimated based on the observations. It is shown that the stock return predictability can significantly impact the optimal bond portfolio. The welfare loss from ignoring learning can be considerable.