Journal of the Korean Operations Research and Management Science Society (한국경영과학회지)

The Korean Operations Research and Management Science Society (한국경영과학회)
권호 표지
DOI QR코드

DOI QR Code

Portfolio Management with the Business Cycle and Bayesian Learning

경기주기와 베이지안 학습(Bayesian learning) 기법을 고려한 개인의 자산관리 연구

  • Park, Seyoung (Department of Industrial and Management Engineering, POSTECH) ;
  • Lee, Hyun-Tak (Department of Industrial and Management Engineering, POSTECH) ;
  • Rhee, Yuna (Risk Management Department, Korea Development Bank) ;
  • Jang, Bong-Gyu (Department of Industrial and Management Engineering, POSTECH)
  • 박세영 (포항공과대학교 산업경영공학과) ;
  • 이현탁 (포항공과대학교 산업경영공학과) ;
  • 이유나 (한국산업은행 리스크관리부) ;
  • 장봉규 (포항공과대학교 산업경영공학과)
  • Received : 2013.11.29
  • Accepted : 2014.03.06
  • Published : 2014.06.30
Download PDF
⟨ Previous Next ⟩

Abstract

This paper studies optimal consumption and investment behaviors of an individual when risky asset returns and her income are affected by the business cycle. The investor considers the incomplete information risk of unobservable macroeconomic conditions and updates her belief of expected risky asset returns through Bayesian learning. We find that the optimal investment strategy, certainty equivalent wealth, and portfolio hedging demand significantly depend on the belief about the macroeconomic conditions.

Keywords

References

  1. Alexander, C. and A. Kaeck, "Regime dependent determinants of credit default swap spreads," Journal of Banking and Finance, Vol.32, No.6(2008), pp.1008-1021. https://doi.org/10.1016/j.jbankfin.2007.08.002
  2. Ang, A. and G. Bekaert, "International Asset Allocation With Regime Shifts," Review of Financial Studies, Vol.15, No.4(2002), pp.1137-1187. https://doi.org/10.1093/rfs/15.4.1137
  3. Bodie, Z., R.C. Merton, and W.F. Samuelson, "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Vol.16, No.34(1992), pp.427-449. https://doi.org/10.1016/0165-1889(92)90044-F
  4. Brennan, M.J., "The Role of Learning in Dynamic Portfolio Decisions," European Finance Review, Vol.1, No.3(1998), pp.295-306. https://doi.org/10.1023/A:1009725805128
  5. Campbell, J.Y. and J.H. Cochrane, "By Force of Habit : A Consumption-Based Explanation of Aggregate Stock Market Behavior," Journal of Political Economy, Vol.107, No.2 (1999), pp.205-251. https://doi.org/10.1086/250059
  6. Campbell, J.Y. and L.M. Viceira, "Consumption and Portfolio Decisions when Expected Returns are Time Varying," The Quarterly Journal of Economics, Vol.114, No.2(1999), pp.433-495. https://doi.org/10.1162/003355399556043
  7. Das, S.R., L. Freed, G. Geng, and N. Kapadia, "Correlated Default Risk," The Journal of Fixed Income, Vol.16, No.2(2006), pp.7-32.
  8. Detemple, J.B., "Asset Pricing in a Production Economy with Incomplete Information," The Journal of Finance, Vol.41, No.2(1986), pp.383-391. https://doi.org/10.1111/j.1540-6261.1986.tb05043.x
  9. Dybvig, P.H. and H. Liu, "Lifetime consumption and investment : Retirement and constrained borrowing," Journal of Economic Theory, Vol.145, No.3(2010), pp.885-907. https://doi.org/10.1016/j.jet.2009.08.003
  10. Farhi, E. and S. Panageas, "Saving and investing for early retirement : A theoretical analysis," Journal of Financial Economics, Vol.83, No.1(2007), pp.87-121. https://doi.org/10.1016/j.jfineco.2005.10.004
  11. Feldman, D., "The Term Structure of Interest Rates in a Partially Observable Economy," The Journal of Finance, Vol.44, No.3(1989), pp.789-812. https://doi.org/10.1111/j.1540-6261.1989.tb04391.x
  12. Hamilton, J.D., "A New Approach to the Economic Analysis of Nonstationary Time Series and the Business Cycle," Econometrica, Vol.57, No.2(1989), pp.357-384. https://doi.org/10.2307/1912559
  13. Hamilton, James D., "Regime-switching models," The new palgrave dictionary of economics 2, 2008.
  14. Jang, B.-G., H.K. Koo, H. Liu, and M. Loewenstein, "Liquidity Premia and Transaction Costs," The Journal of Finance, Vol.62, No.5(2007), pp.2329-2366. https://doi.org/10.1111/j.1540-6261.2007.01277.x
  15. Judd, K.L., Numerical methods in economics, The MIT press, 1998.
  16. Karatzas, I. and X.-X. Xue, "A Note On Utility Maximization Under Partial Observations1," Mathematical Finance, Vol.1, No.2(1991), pp.57-70.
  17. Koo, H.K., "Consumption and Portfolio Selection with Labor Income : A Continuous Time Approach," Mathematical Finance, Vol.8, No.1(1998), pp.49-65. https://doi.org/10.1111/1467-9965.00044
  18. Liptser, R.S., A. Shiryayev, Statistics of Random Processes, Vol.1, General Theory, Springer-Verlag, 1977.
  19. Liptser, R.S., A. Shiryayev, Statistics of Random Processes, Vol.2, Applications, Springer-Verlag, 1978.
  20. Liu, H., "Dynamic portfolio choice under ambiguity and regime switching mean returns," Journal of Economic Dynamics and Control, Vol.35, No.4(2011), pp.623-640. https://doi.org/10.1016/j.jedc.2010.12.012
  21. Markowitz, H., "PORTFOLIO SELECTION," The Journal of Finance, Vol.7, No.1(1952), pp.77-91.
  22. Merton, R.C., "Lifetime Portfolio Selection under Uncertainty : The Continuous-Time Case," The Review of Economics and Statistics, Vol.51, No.3(1969), pp.247-257. https://doi.org/10.2307/1926560
  23. Merton, R.C., "Optimum consumption and portfolio rules in a continuous-time model," Journal of Economic Theory, Vol.3, No.4 (1971), pp.373-413. https://doi.org/10.1016/0022-0531(71)90038-X
  24. Viceira, L.M., "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," The Journal of Finance, Vol.56, No.2(2001), pp.433-470. https://doi.org/10.1111/0022-1082.00333
  25. Wang, N., "Optimal consumption and asset allocation with unknown income growth," Journal of Monetary Economics, Vol.56, No.4(2009), pp.524-534. https://doi.org/10.1016/j.jmoneco.2009.03.005
  26. Xia, Y., "Learning about Predictability : The Effects of Parameter Uncertainty on Dynamic Asset Allocation," The Journal of Finance, Vol.56, No.1(2001), pp.205-246. https://doi.org/10.1111/0022-1082.00323