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Mathematics and Financial Economics

, Volume 12, Issue 4, pp 561–587 | Cite as

Dynamic asset allocation with event risk, transaction costs and predictable returns

  • Jean-Guy Simonato
Article
  • 116 Downloads

Abstract

We examine the interplay between event risk, transaction costs and predictability on the dynamic asset allocation of an investor with discrete trading opportunities. The model is calibrated to the U.S. stock market and a Gauss–Hermite quadrature approach is used to solve the investor’s dynamic optimization problem. Numerical scenarios are examined to show the impact of event risk on asset allocations, hedging demands, no-trading regions, and certainty equivalent returns. It is found that event risk shrinks hedging demand. Neglecting event risk can also lead to sizeable certainty equivalent return losses.

Keywords

Dynamic asset allocation Event risk Jumps Transaction costs Return predictability 

JEL Classification

G11 C61 C22 

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Copyright information

© Springer-Verlag GmbH Germany, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of FinanceHEC MontréalMontrealCanada

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