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Dynamic Asset Allocation under Inflation
Author(s) -
Brennan Michael J.,
Xia Yihong
Publication year - 2002
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 - 10.1111/1540-6261.00459
Subject(s) - bond , economics , asset allocation , maturity (psychological) , hedge , portfolio , risk aversion (psychology) , cash flow , financial economics , stock (firearms) , econometrics , inflation (cosmology) , microeconomics , expected utility hypothesis , finance , psychology , ecology , developmental psychology , mechanical engineering , physics , theoretical physics , engineering , biology
We develop a simple framework for analyzing a finite‐horizon investor's asset allocation problem under inflation when only nominal assets are available. The investor's optimal investment strategy and indirect utility are given in simple closed form. Hedge demands depend on the investor's horizon and risk aversion and on the maturities of the bonds included in the portfolio. When short positions are precluded, the optimal strategy consists of investments in cash, equity, and a single nominal bond with optimally chosen maturity. Both the optimal stock‐bond mix and the optimal bond maturity depend on the investor's horizon and risk aversion.