Multi-period portfolio choice and the intertemporal hedging demands for stocks and bonds: International evidence

Abstract

We investigate the intertemporal hedging demands for stocks and bonds for investors in the U.S., Australia, Canada, France, Germany, Italy, and U.K. Using the methodology of Campbell et al. [Campbell, J.Y., Chan, Y.L., Viceira, L.M., 2003a. A multivariate model of strategic asset allocation. Journal of Financial Economics 67(1), 41–81], we solve a multi-period portfolio choice problem for an investor in each country with an infinite horizon and Epstein–Zin–Weil utility, where the dynamics governing asset returns are described by a vector autoregressive process. We find sizable mean intertemporal hedging demands for domestic stocks in the U.S. and U.K. and considerably smaller mean hedging demands for domestic stocks in the other countries. An investor in the U.S. who has access to foreign stocks and bonds displays small mean intertemporal hedging demands for foreign stocks and bonds, while investors in Australia, Canada, France, Germany, Italy, and the U.K. who have access to U.S. stocks and bonds all exhibit sizable mean hedging demands for U.S. stocks.