The term structure of the risk-return tradeoff
By: John Y. Campbell, Luis M. Viceira.
Contributors: Viceira, Luis M.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 11119; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 11119.
Publisher: National Bureau of Economic Research
Published: 2005
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Investments -- Mathematical models.; Stocks -- Mathematical models.; Bonds -- Mathematical models.; Rate of return -- Mathematical models.; Asset allocation -- Mathematical models.; Risk -- Mathematical models.
Description: "Recent research in empirical finance has documented that expected excess returns on bonds and stocks, real interest rates, and risk shift over time in predictable ways.  Furthermore, these shifts tend to persist over long periods of time.  In this paper we propose an empirical model that is able to capture these complex dynamics, yet is simple to apply in practice, and we explore its implications for asset allocation.  Changes in investment opportunities can alter the risk-return tradeoff of bonds, stocks, and cash across investment horizons, thus creating a 'term structure of the risk-return tradeoff.' We show how to extract this term structure from our parsimonious model of return dynamics, and illustrate our approach using data from the U.S. stock and bond markets.  We find that asset return predictability has important effects on the variance and correlation structure of returns on stocks, bonds and T-bills across investment horizons"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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