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Parametric Portfolio Policies in the Surplus Consumption Ratio
Author(s) -
Inkmann Joachim,
Shi Zhen
Publication year - 2015
Publication title -
international review of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.489
H-Index - 18
eISSN - 1468-2443
pISSN - 1369-412X
DOI - 10.1111/irfi.12049
Subject(s) - economics , portfolio , bond , econometrics , consumption (sociology) , stock (firearms) , estimator , parameterized complexity , microeconomics , order (exchange) , mathematical economics , mathematics , financial economics , finance , mechanical engineering , social science , statistics , combinatorics , sociology , engineering
The surplus consumption ratio plays a central role as a state variable in successful attempts to explain the time series properties of stock and bond prices with consumption‐based asset pricing models. In this paper, optimal portfolio policies for a strategic investor who maximizes the conditionally expected utility of terminal wealth are parameterized as a polynomial in the surplus consumption ratio. Optimal portfolio policies are estimated using a method of moments estimator based on E uler equations. Unconditional portfolio policies are rejected in favor of conditional policies. Lower order polynomials are rejected in favor of higher order polynomials. Optimal stock and bond allocations are clearly countercyclical.