Long Memory and the Term Structure of Risk, working paper WP 06-009

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Item type:	Monograph (Working Paper)
Number of Pages:	29
Date:	24 February 2006
Institutions:	Business, Economics and Information Systems > Institut für Volkswirtschaftslehre und Ökonometrie > Lehrstuhl für Ökonometrie (Prof. Dr. Rolf Tschernig)
Keywords:	Long-term portfolio choice; Term structure of risk; Linear processes with fractional integration
Dewey Decimal Classification:	300 Social sciences > 330 Economics
Status:	Published
Refereed:	Yes, this version has been refereed
Created at the University of Regensburg:	Unknown
Item ID:	216

Abstract

This paper focuses on the implications of asset return predictability on long-term portfolio choice when return forecasting variables exhibit long memory. Recent research in empirical finance argues that expected asset returns are time-varying and relates them to various predicting variables that historically reveal very gradual movements in time; hence, we aim at careful modelling of their ...

Abstract

This paper focuses on the implications of asset return predictability on long-term portfolio choice when return forecasting variables exhibit long memory. Recent research in empirical finance argues that expected asset returns are time-varying and relates them to various predicting variables that historically reveal very gradual movements in time; hence, we aim at careful modelling of their persistence properties. For that purpose, we exploit the class of fractionally integrated processes. Our theoretical derivations indicate profound impact of the long-memory component on optimal long-term portfolio weights. We illustrate our approach to the modelling of asset return dynamics on post-war US data for equities, Treasury bonds, and cash.

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