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Estimating Portfolio and Consumption Choice: A Conditional Euler Equations Approach
Author(s) -
Brandt Michael W.
Publication year - 1999
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/0022-1082.00162
Subject(s) - portfolio , economics , econometrics , dividend yield , consumption (sociology) , risk aversion (psychology) , treasury , nonparametric statistics , yield (engineering) , portfolio optimization , index (typography) , time horizon , dividend , financial economics , expected utility hypothesis , computer science , finance , dividend policy , social science , materials science , archaeology , sociology , world wide web , metallurgy , history
This paper develops a nonparametric approach to examine how portfolio and consumption choice depends on variables that forecast time‐varying investment opportunities. I estimate single‐period and multiperiod portfolio and consumption rules of an investor with constant relative risk aversion and a one‐month to 20‐year horizon. The investor allocates wealth to the NYSE index and a 30‐day Treasury bill. I find that the portfolio choice varies significantly with the dividend yield, default premium, term premium, and lagged excess return. Furthermore, the optimal decisions depend on the investor's horizon and rebalancing frequency.