Abstract
There are now many examples of empirical single-period mean-variance (mv) models of portfolio behaviour.1 The main features of these models are that:
-
1.
the mv utility functions underlying their optimising behaviour have marginal rates of substitution between m and v that are independent of asset holdings; this leads to linear asset demand systems with the optimal holdings of assets determined explicitly;
-
2.
the estimates of the expectations and risks of the returns on the assets in the portfolios are generally backward-looking, often determined as constants or moving averages from the historical sample;
-
3.
little attention is generally paid to the question of the dynamic adjustment of the portfolio; this implicitly assumes that individuals are always, or are at least quite close to, holding optimal portfolios.
This is a preview of subscription content, log in via an institution to check access.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
V. A. Aivazian, J. L. Callen, I. Krinsky and C. C. Y. Kwan (1983) ‘Mean-Variance Utility Functions and the Demand for Risky Assets: An Empirical Analysis using Flexible Functional Forms’, Journal of Financial and Quantitative Analysis, 18, 412–24.
G. J. Anderson and R. W. Blundell (1982) ‘Estimation and Hypothesis Testing in Dynamic Singular Equation Systems’, Econometrica, 50, 1559–72.
G. J. Anderson and R. W. Blundell (1983) ‘Testing Restrictions in a Flexible Dynamic Demand System: An Application to Consumers Expenditure in Canada’, Review of Economic Studies, 50 397–410.
G. J. Anderson and R. W. Blundell (1984) ‘Consumer Non-Durables in the UK: A Dynamic Demand System’, Economic Journal, 94, Supplement, 35–44 (Annual Conference of RES and AUTE, Brasenose College, Oxford, 1983).
R. J. Barrett, M. R. Gray and J. M. Parkin (1975) ‘The Demand for Financial Assets by the Personal Sector of the UK Economy’, in G. Renton (ed.), Modelling the Economy, London: Heinemann.
D. Blake (1989) ‘Testing Models Generating Time-varying Asset Return Expectations and Risks: The Case of U.K. Private Sector Pension Funds’, Economic Modelling, 6, 220–40.
D. Blake (1990) ‘Portfolio Behaviour and Asset Pricing in a Characteristics Framework’, Scottish Journal of Political Economy, forthcoming.
D. Blake (1991) ‘Testing a Non-linear Model of Portfolio Behaviour with Time-varying Expectations and Risks: The Case of U.K. Private Sector Pension Funds’, Applied Financial Economics, forthcoming.
T. P. Bollerslev, R. F. Engle and J. M. Woolridge (1988) ‘A Capital Asset Pricing Model with Time-varying Covariances’, Journal of Political Economy, 96, 116–31.
D. Breeden (1979) ‘An Intertemporal Asset Pricing Model With Stochastic Consumption and Investment Opportunities’, Journal of Finance, 7, 265–96.
A. F. Burns and W. C. Mitchell (1956) Measuring Business Cycles, New York: NBER.
G. Chow (1979) ‘Optimal Control of Stochastic Differential Equation Systems’, Journal of Economic Dynamics and Control, 1, 143–75.
A. S. Courakis (1974) ‘Clearing Bank Asset Choice Behaviour: A Mean Variance Treatment’, Oxford Bulletin of Economics and Statistics, 36, 173–201.
A. S. Courakis (1975) ‘Testing Theories of Discount House Portfolio Selection’, Review of Economic Studies, 62, 643–48.
A. S. Courakis (1980) ‘In Search of an Explanation of Commercial Bank Short-Run Portfolio Selection’, Oxford Bulletin of Economics and Statistics, 42, 305–35.
A. Cukierman and P. Wachtel (1979) ‘Differential Inflationary Expectations and the Variability of Inflation’, American Economic Review, 69, 595–609.
E. F. Fama (1976) Foundations of Finance, Oxford: Basil Blackwell.
E. F. Fama (1981) ‘Stock Returns, Real Activity, Inflation and Money’, American Economic Review, 71, 545–65.
W. E. Ferson (1983) ‘Expectations of Real Interest Rates and Aggregate Consumption: Empirical Tests’, Journal of Financial and Quantitative Analysis, 18, 477–95.
S. Fischer (1975) ‘The Demand for Index Bonds’, Journal of Political Economy, 83, 509–34.
E. Foster (1978) ‘The Variability of Inflation’, Review of Economics and Statistics, 60, 346–50.
D. Ghosh and M. J. Parkin (1970) ‘An Econometric Investigation of the Portfolio and Debt Behaviour of Building Societies’, University of Essex discussion paper, 24 (June).
M. R. Gibbons and W. E. Ferson (1985) ‘Testing Asset Pricing Models with Changing Expectations and an Unobservable Market Portfolio’, Journal of Financial Economics, 14, 217–36.
W. M. Gorman (1980) ‘A Possible Procedure for Analysing Quality Differentials in the Egg Market’, Review of Economic Studies, 47, 843–56 (originally Journal Paper J-3129 of Iowa State College of Agriculture and Mechanical Arts, 1956).
S. Grossman and R. J. Shiller (1981) ‘The Determinants of the Variability of Stock Market Prices’, American Economic Review, 71, 222–9.
D. F. Hendry and T. von Ungern Sternberg (1980) ‘Liquidity and Inflation Effects on Consumers’ Expenditure’, in A. S. Deaton (ed.), Essays in the Theory of Measurement of Consumer Behaviour, Cambridge: Cambridge University Press.
P. Honohan (1980) ‘Testing a Standard Theory of Portfolio Selection’, Oxford Bulletin of Economics and Statistics, 42, 17–34.
G. Keating (1985) ‘The Financial Sector of the LBS Model’, in D. A. Currie (ed.), Advances in Monetary Theory, London: Croom Helm.
S. LeRoy and C. J. LaCivita (1981) ‘Risk Aversion and the Dispersion of Asset Prices’, Journal of Business, 54, 535–48.
R. Merton (1969) ‘Lifetime Portfolio Selection Under Uncertainty: The Continuous Time Case’, Review of Economics and Statistics, 51, 247–57.
R. Merton (1971) ‘Optimal Consumption and Portfolio Rules in a Continuous Time Model’, Journal of Economic Theory, 3, 373–413.
R. R. Officer (1971) ‘A Time Series Examination of the Market Factor of the New York Stock Exchange’, Ph.D. dissertation, University of Chicago.
A. Pagan (1984) ‘Econometric Issues in the Analysis of Regressions with Generated Regressors’, International Economic Review, 25, 221–47.
A. Pagan, A. D. Hall and P. K. Trivedi (1983) ‘Assessing the Variability of Inflation’, Review of Economic Studies, 50, 585–96.
J. M. Parkin (1970) ‘Discount House Portfolio and Debt Selection Behaviour’, Review of Economic Studies, 37, 469–97.
J. M. Parkin, M. R. Gray and R. J. Barrett (1970) ‘The Portfolio Behaviour of Commercial Banks’, in K. Hilton and D. F. Heathfield (eds), The Econometric Study of the UK, London: Macmillan.
A. W. Phillips (1954) ‘Stabilisation Policy in a Closed Economy’, Economic Journal, 64, 290–323.
A. W. Phillips (1957) ‘Stabilisation Policy and the Time Forms of Lagged Responses’, Economic Journal, 67, 265–77.
W. F. Sharpe (1985) Investments, Englewood Cliffs, N.J.: Prentice-Hall International.
P. D. Spencer (1981) ‘A Model of the Demand for British Government Stocks by Non-Bank Residents 1967–77’, Economic Journal, 91, 938–60.
J. Tobin (n.d.) ‘Properties of Assets’ (chapter 2 of an unpublished manuscript).
H. Wills (1979) ‘Inferring Expectations’, London: LSE (unpublished).
Editor information
Editors and Affiliations
Copyright information
© 1992 T. E. Cooke, J. Matatko and the estate of the late D. C. Stafford
About this chapter
Cite this chapter
Blake, D. (1992). A Non-linear Model of Portfolio Behaviour With Time-varying Expectations and Risks. In: Cooke, T.E., Matatko, J., Stafford, D.C. (eds) Risk, Portfolio Management and Capital Markets. Palgrave Macmillan, London. https://doi.org/10.1007/978-1-349-11666-9_5
Download citation
DOI: https://doi.org/10.1007/978-1-349-11666-9_5
Publisher Name: Palgrave Macmillan, London
Print ISBN: 978-1-349-11668-3
Online ISBN: 978-1-349-11666-9
eBook Packages: Palgrave Economics & Finance CollectionEconomics and Finance (R0)