Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information

R.P.P.M. Hoevenaars, R.D.J. Molenaar, P.C. Schotman, T.B.M. Steenkamp

Research output: Contribution to JournalArticleAcademicpeer-review

Abstract

We study the effect of parameter uncertainty on the long-run risk for three asset classes: stocks, bills and bonds. Using a Bayesian vector autoregression with an uninformative prior we find that parameter uncertainty raises the annualized long-run volatilities of all three asset classes proportionally with the same factor relative to volatilities that are conditional on maximum likelihood parameter estimates. As a result, the horizon effect in optimal asset allocations is much weaker compared to models in which only equity returns are subject to parameter uncertainty. Results are sensitive to alternative informative priors, but generally the term structure of risk for stocks and bonds is relatively flat for investment horizons up to 15years. © 2013 John Wiley & Sons, Ltd.
Original languageEnglish
Pages (from-to)353-376
JournalJournal of Applied Econometrics
Volume29
Issue number3
DOIs
Publication statusPublished - 2014

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investor
assets
uncertainty
bill
equity
Parameter uncertainty
Prior information
Investors
Strategic asset allocation
Assets
Maximum likelihood
Equity returns
Bayesian vector autoregression
Optimal asset allocation
Term structure
Factors
Investment horizon

Bibliographical note

PT: J; NR: 40; TC: 0; J9: J APPL ECONOMET; PG: 24; GA: AE0VM; UT: WOS:000333684300001

Cite this

Hoevenaars, R.P.P.M. ; Molenaar, R.D.J. ; Schotman, P.C. ; Steenkamp, T.B.M. / Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information. In: Journal of Applied Econometrics. 2014 ; Vol. 29, No. 3. pp. 353-376.
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Strategic Asset Allocation for Long-Term Investors: Parameter Uncertainty and Prior Information. / Hoevenaars, R.P.P.M.; Molenaar, R.D.J.; Schotman, P.C.; Steenkamp, T.B.M.

In: Journal of Applied Econometrics, Vol. 29, No. 3, 2014, p. 353-376.

Research output: Contribution to JournalArticleAcademicpeer-review

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AU - Steenkamp, T.B.M.

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