Abstract
Next we want to use the theoretical model to undertake some empirical work. The main issue here is how expected returns can be modeled and then included in a dynamic decision framework. The academic research on asset returns appears to converge toward the view that expected asset returns are not constant over time. Thus, as shown in Campbell and Viceira (2002) and also Semmler et al. (2009), the use of time varying asset returns appears to be most useful for the purpose of studying dynamic consumption and portfolio decisions. This is justified by looking at the data. Empirically, though there has been a general upward movement in wealth in the US, there also were large cyclical movements since the 1980s, in particular since the 1990s and in recent years. The meltdown of wealth of the years 2007-9 documents a strong periodic decline of wealth, and thus more studies looking at the periodic components of returns and wealth accumulation may be needed.
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