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| Tekijä: | Kahra, Hannu |  | |
| Otsikko: | Consumption, Liquidity and Strategic Asset Allocation | ||
| Sarja: | Acta Universitatis oeconomicae Helsingiensis. A, ISSN 1237-556X; 221 | ||
| Sarjan numero: | A-221 | ||
| Vuosi: | 2003 Väitöspäivä: 2003-08-29 | ||
| Aine: | Taloustieteiden kvantitatiiviset menetelmät | ||
| Asiasanat: | Financial markets; Hinnoittelu; Portfolio; Pricing; Rahoitusmarkkinat | ||
| Kieli: | eng | ||
| Bibid: | 295064 | ||
| ISBN: | 951-791-791-0 | ||
| Tiivistelmä (eng): | This study is based on a theoretical construction of the stochastic discount factor (SDF) framework of asset pricing theory and associated empirical verification procedures. The standard consumption-based asset pricing model (CCAPM) is extended by introducing nonseparability in the utility function by adding liquidity to the utility function as an additional argument. When the Euler equations of the underlying power utility function of consumption and liquidity are estimated by GMM, it is found that liquidity is a direct and an important source of utility. When the recursive Epstein-Zin preferences are assumed, it is found that: (1) the representative investor has an elasticity of intertemporal substitution less than one, (2) the income effect dominates the substitution effect, (3) the coefficient of relative risk aversion is above one, and (4) consumers prefer the early resolution of uncertainty.
To illustrate the theory, portfolios of long-term investors are solved, such that the allocations are implied by particular preference parameters, together with particular beliefs about the stochastic processes driving asset returns. These portfolios are based on the framework of Merton's theoretical concept of intertemporal hedging demand by long-term investors. The analysis shows that home bias results in suboptimal portfolios, since it is optimal to have a currency overlay on the portfolio and not to hedge the currency risk. Long-term investors should also respond to mean-reverting equity returns by increasing their average allocation in equities. Furthermore, conservative, long-term investors should tilt their portfolios toward bonds, rather than toward the short-term risk-free asset, as is suggested by the standard short-term mean-variance analysis. The pricing model is extended by allowing for a nonlinear pricing kernel, such that marginal utility is modeled in terms of higher order moments of the excess return distribution. The underlying distribution is the generalized Student t distribution. The pricing model offers an explanation to the ``equity premium puzzle,'' basing on the idea that a fat-tailed return distribution corresponds to large absolute observations in the sample. The model predicts a risk premium of 6-8 per cent on U.S. equities over the Treasury bills, which is consistent with the observed risk premium in longer time-series. The multi-objective portfolio problem is extended by use of polynomial goal programming, considering the distribution's: (1) mean, (2) variance, (3) skew, and (4) kurtosis. Assuming that the investor has equal preferences over the four first moments, the resulting portfolio is more conservative than that which is limited by the standard mean-variance portfolio criteria. | ||
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| Vastaväittäjät: | Martin, Vance L professori University of Melbourne, Australia
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| Kustos: | Kanto, Antti professori | ||
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