Portfolio choice and equity characteristics: characterizing the hedging demands induced by return predictability

• 成果类型: Article
• 署名作者: Lynch, AW
• 署名单位: New York University; Columbia University
• 刊物名称: JOURNAL OF FINANCIAL ECONOMICS
• ISSN/ISSBN: 0304-405X
• DOI: 10.1016/S0304-405X(01)00074-5
• 发表日期: 2001
• 页码: 67-130
• 关键词: portfolio choice; Return predictability; multiple risky assets; hedging demands

摘要

This paper examines portfolio allocation across equity portfolios formed on the basis of characteristics like size and book-to-market. In particular, the paper assesses the impact of return predictability on portfolio choice for a multi-period investor with a coefficient of relative risk aversion of 4. Compared to the investor's allocation in her last period, return predictability with dividend yield causes the investor early in life to tilt her risky-asset portfolio away from high book-to-market stocks and away from small stocks. These results are explained using Merton's (Econometrica 41 (1973) 867) characterization of portfolio allocation by a multi-period investor in a continuous time setting. Abnormal returns relative to the investor's optimal early life portfolio are also calculated. These abnormal returns are found to exhibit the same cross-sectional patterns as abnormal returns calculated relative to the market portfolio: higher for small rather than large firms, and higher for high rather than low book-to-market firms. Thus, hedging demand may be a partial explanation for the high expected returns documented for small firms and high book-to-market firms. However, even with this hedging demand, the investor wants to sell short the low book-to market portfolio to hold the high book-to-market portfolio. The utility costs of using a value-weighted equity index or of ignoring predictability are also calculated. An investor using a value-weighted equity index would give up a much larger fraction of her wealth to have access to book-to-market portfolio than size portfolios. Finally, an investor would give up a much larger fraction of her wealth to have access to dividend yield information than term spread information. (C) 2001 Published by Elsevier Science S.A.