Sustainable Asset Accumulation and Dynamic Portfolio Decisions (Dynamic Modeling and Econometrics in Economics and Finance, 18)

This Book Examines Sustainable Wealth Formation And Dynamic Decision-making. The Global Economy Experienced A Veritable Meltdown Of Asset Markets In The Years 2007-9, Where Many Funds Were Overexposed To Risky Returns And Suffered Considerable Losses. On The Other Hand, The Long-term Upswing In The Stock Market Since 2010 Has Led To Asset Price Booms And Some New, But Also Uneven, Wealth Formation. In This Book A Broader Set Of Constraints And Guidelines For Asset Management And Wealth Accumulation Is Developed. The Authors Investigate How Wealth Formation And The Proper Management Of Financial Funds Can Help To Adequately Buffer Income Risk And Obtain Sufficient Risk-free Income At A Later Stage Of Life, While Also Being Socially And Environmentally Sustainable. The Book Explores Behavioral And Institutional Rules For Decision-making That Reflect Such Constraints And Guidelines, Without Necessarily Being Optimal In The Narrow Sense.^ The Authors Explain The Need For Such A Dynamic Decision-making And Dynamic Re-balancing Of Portfolios, By Putting Forward Dynamic Programming As An Approach To Dynamic Decision-making That Can Allow Sustainable Wealth Accumulation And Dynamic Asset Allocation To Be Successfully Integrated. This Book Provides A Clear And Comprehensive Treatment Of Asset Accumulation And Dynamic Portfolio Models With An Emphasis On Long Term And Sustainable Wealth Formation. An Important Concern In Public Debate Is The Sustainability Of Our Economy And This Book Employs Cutting Edge Quantitative Techniques And Models To Highlight Important Facts That Cannot Be Disputed Under Any Reasonable Assumptions. It Has The Potential To Become A Standard Reference For Both Academic Researchers And Quantitatively Trained Practitioners. Eckhard Platen, Professor Of Quantitative Finance, University Of Technology Sydney, Australia This Book Should Be Read By Both Academics And Practitioners Alike.^ The Former Will Find Intellectually Rigorous Discussions And Innovative Solutions. The Latter May Find A Few Of The Concepts A Bit Challenging. Yet, Theory And Technology Are There To Help Simplify The Work Of Those Who Worry About What Time It Is Rather Than How To Make A Watch-- But They Do Need A Watch. Jean Brunel, Founder Of Brunel Associates And Editor Of The Journal Of Wealth Management. Preface; Acknowledgements; Contents; List Of Figures; List Of Tables; 1 Introduction; 1.1 Institutions, Models And Empirics; 1.2 Dynamic Programming As Solution Method; 1.3 Previous Work; 1.4 Outline And Results; 2 Forecasting And Low Frequency Movements Of Asset Returns; 2.1 Introduction; 2.2 Limits On Forecasting Asset Returns; 2.3 The Use Of Periodic Returns; 2.4 Conclusions; 3 Portfolio Modeling With Sustainability Constraints; 3.1 Introduction; 3.2 Mean-variance Portfolio Models; 3.3 Description Of Statistical Properties Of Returns Data. 3.3.1 Computing Expected Real Returns On Risky Assets3.3.2 Variance-covariance And Correlation Matrices And Volatility Of Real Returns; 3.3.3 Eigenvalue And Eigenvector Properties Of The Empirical Covariance And Correlation Matrix; 3.4 Estimation Results Of The Portfolio Models; 3.5 Conclusion; Appendix; Forecasting The Monthly Consumer Price Inflation; Capital Allocation Line And Efficient Frontiers; 4 Dynamic Saving And Portfolio Decisions-theory; 4.1 Introduction; 4.2 The Model With One Asset And Constant Returns; 4.2.1 Numerical Results For The Benchmark Model. 4.2.2 Variation Of Risk Aversion, Returns And Discount Rate4.3 Dynamic Consumption And Portfolio Decisions: Two Assets And Time Varying Returns; 4.3.1 The Model With Time Varying Returns; 4.3.2 Numerical Results On A Benchmark Case; 4.3.3 Variation Of Risk Aversion; 4.3.4 Variation Of Returns; 4.3.5 Variation Of Time Horizon; 4.4 A Stochastic Model With Mean Reversion In Returns; 4.5 Conclusions; Appendix; The Solution To The Dynamic Decision Problem With One Asset; 5 Asset Accumulation With Estimated Low Frequency Movements Of Asset Returns; 5.1 Introduction; 5.2 The Literature And Results. 5.3 The Dynamic Programming Solution5.4 Varying Risk Aversion Across Investors; 5.5 Varying Time Horizon Across Investors; 5.6 Some Conclusions; 6 Asset Accumulation And Portfolio Decisions With Time Varying Asset Returns And Labor Income ; 6.1 Introduction; 6.2 Literature And Results; 6.3 Business Cycles, Asset Returns And Labor Income; 6.4 Dynamic Decisions On Asset Accumulation; 6.5 Wealth Disparities; 6.6 Conclusions; 7 Continuous And Discrete Time Modeling; 7.1 Introduction; 7.2 Literature And Results; 7.3 Discrete-time Approximation; 7.3.1 Euler Method; 7.3.2 Milstein Method. 7.3.3 New Local Linearization Method7.3.4 Equivalence Of The Euler And Nll Predictors; 7.4 Empirical Results On Modeling Short Term Interest Rates; 7.4.1 Specification Test; 7.4.1.1 Autocorrelation Checking; 7.4.1.2 Testing Normality; 7.4.2 Results Of Estimating Ckls Model; 7.5 Searching For New Models; 7.5.1 Improvement In The Continuous-time Framework; 7.5.2 Modeling Autocorrelations In The Estimated Noise; 7.5.3 Modeling Thick-tails In The Estimated Noise; 7.5.4 Model Identification; 7.5.5 Results; 7.6 Conclusions; Appendix; Tables: Estimation Results. Carl Chiarella [and Three Others]. Includes Bibliographical References. Annotation This book examines sustainable wealth formation and dynamic decision-making. The global economy experienced a veritable meltdown of asset markets in the years 2007-9, where many funds were overexposed to risky returns and suffered considerable losses. On the other hand, the long-term upswing in the stock market since 2010 has led to asset price booms and some new, but also uneven, wealth formation. In this book a broader set of constraints and guidelines for asset management and wealth accumulation is developed. The authors investigate how wealth formation and the proper management of financial funds can help to adequately buffer income risk and obtain sufficient risk-free income at a later stage of life, while also being socially and environmentally sustainable. The book explores behavioral and institutional rules for decision-making that reflect such constraints and guidelines, without necessarily being optimal in the narrow sense. The authors explain the need for such a dynamic decision-making and dynamic re-balancing of portfolios, by putting forward dynamic programming as an approach to dynamic decision-making that can allow sustainable wealth accumulation and dynamic asset allocation to be successfully integrated. This book provides a clear and comprehensive treatment of asset accumulation and dynamic portfolio models with an emphasis on long term and sustainable wealth formation. An important concern in public debate is the sustainability of our economy and this book employs cutting edge quantitative techniques and models to highlight important facts that cannot be disputed under any reasonable assumptions. It has the potential to become a standard reference for both academic researchers and quantitatively trained practitioners. Eckhard Platen, Professor of Quantitative Finance, University of Technology Sydney, AustraliaThis book should be read by both academics and practitioners alike. The former will find intellectually rigorous discussions and innovative solutions. The latter may find a few of the concepts a bit challenging. Yet, theory and technology are there to help simplify the work of those who worry about what time it is rather than how to make a watch-- but they do need a watch. Jean Brunel, Founder of Brunel Associates and Editor of The Journal of Wealth Management Front Matter....Pages i-xviii Introduction....Pages 1-8 Forecasting and Low Frequency Movements of Asset Returns....Pages 9-17 Portfolio Modeling with Sustainability Constraints....Pages 19-51 Dynamic Saving and Portfolio Decisions-Theory....Pages 53-79 Asset Accumulation with Estimated Low Frequency Movements of Asset Returns....Pages 81-96 Asset Accumulation and Portfolio Decisions with Time Varying Asset Returns and Labor Income....Pages 97-114 Continuous and Discrete Time Modeling....Pages 115-137 Asset Accumulation and Portfolio Decisions Under Inflation Risk....Pages 139-177 Concluding Remarks....Pages 179-180 Back Matter....Pages 181-189