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http://dx.doi.org/10.7737/JKORMS.2014.39.2.049

Portfolio Management with the Business Cycle and Bayesian Learning  

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)
Publication Information
Journal of the Korean Operations Research and Management Science Society / v.39, no.2, 2014 , pp. 49-66 More about this Journal
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
Business Cycle; Bayesian Learning; Portfolio Management; Unobservable Markov Chain; Incomplete Information;
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