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Finance and Financial Management
Jumps; time-varying investment opportunities; dynamic asset allocation; non-normality; skewness and kurtosis; predictability.
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Jumps And Dynamic Asset Allocation, Liuren Wu
Jumps And Dynamic Asset Allocation, Liuren Wu
CRIF Working Paper series
This paper provides a general framework for analyzing optimal dynamic asset allocation problems in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical solutions are obtained, with which I do a thorough comparative study of the impacts of jumps on the dynamic decision. I also calibrate the model to the U.S. equity market and assess the quantitative impacts of jumps under a dynamic environment. I find that jump risk not only makes the investor's allocation more conservative overall but also makes her dynamic portfolio rebalancing less dramatic over time.