Viceira, Luis M.
Overview
Works: 
36
works in
282
publications in
2
languages and
1,707
library holdings

Roles: 
Author, Honoree

Classifications: 
HG4529.5,
332.6 
Most widely held works by
Luis M Viceira
Strategic asset allocation : portfolio choice for longterm investors by John Y Campbell (
Book
)
31
editions published
between
2001
and
2004
in
English and Chinese
and held by
497
libraries
worldwide
This volume offers a scientific foundation for the advice offered by financial planners to longterm investors. It gives statistical evidence on asset return behaviour, and, based on assumed investor objectives, derives optimal portfolio rules
Who should buy longterm bonds? by John Y Campbell (
Book
)
22
editions published
between
1998
and
2000
in
English
and held by
79
libraries
worldwide
According to conventional wisdom, longterm bonds are appropriate for longterm investors who value stability of income. We develop a model of optimal consumption and portfolio choice for infinitelylived investors facing stochastic interest rates, solve it using an approximate analytical method, and evaluate the conventional wisdom. We show that the demand for longterm bonds has both a myopic component and an intertemporal hedging component. As risk aversion increases, the myopic component shrinks to zero but the hedging component does not. An infinitely riskaverse investor who is infinitely unwilling to substitute consumption intertemporally should hold a portfolio of longterm indexed bonds that is equivalent to an indexed perpetuity. This portfolio finances a riskless consumption stream and in this sense provides a stable income. We calibrate our model to postwar US data and compare consumption and portfolio rules with and without bond indexation, portfolio constraints, and the possibility of investment in equities. We find that when indexed bonds are not available, inflation risk leads investors to shorten their bond portfolios and increase their precautionary savings. This has serious welfare costs for conservative investors, who are much better off when they have the opportunity to buy indexed bonds. We also find that the ratio of bonds to equities in the optimal portfolio increases with the coefficient of relative risk aversion, which is consistent with conventional portfolio advice but inconsistent with the mutual fund theorem of static portfolio analysis. Our results illustrate the general point that static portfolio choice models should not be used to study the dynamic problems facing longterm investors
Dynamic consumption and portfolio choice with stochastic volatility in incomplete markets by George Chacko (
Book
)
21
editions published
between
1999
and
2005
in
English
and held by
69
libraries
worldwide
Abstract: This paper analyzes optimal portfolio choice and consumption with stochastic volatility in incomplete markets. Using the DuffieEpstein (1992) formulation of recursive utility in continuous time, it shows that the optimal portfolio demand for stocks under stochastic volatility varies strongly with the investor's coefficient of relative risk aversion, but only slightly with her elasticity of intertemporal substitution; by contrast, optimal consumption relative to wealth depends on both preference parameters. This paper also shows that stochastic variation in volatility produces an optimal intertemporal hedging demand for stocks which is negative when changes in volatility are instantaneously negatively correlated with excess stock returns and investors have coefficients of relative risk aversion larger than one. The absolute size of this demand increases with the size of this correlation, and also with the persistence of shocks to volatility. An application to the US stock market shows that empirically this correlation is negative and large, which implies a negative hedging demand for stocks. This application also shows that only low frequency shocks to volatility exhibit enough persistence to generate sizable hedging demands by longterm, risk averse investors. A comparative statics exercise shows that the size of hedging demands is considerably more sensitive to changes in persistence than to changes in correlation
A multivariate model of strategic asset allocation by John Y Campbell (
Book
)
23
editions published
in
2001
in
English
and held by
68
libraries
worldwide
Much recent work has documented evidence for predictability of asset returns. We show how such predictability can affect the portfolio choices of longlived investors who value wealth not for its own sake but for the consumption their wealth can support. We develop an approximate solution method for the optimal consumption and portfolio choice problem of an infinitelylived investor with EpsteinZin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Empirical estimates in longrun annual and postwar quarterly US data suggest that the predictability of stock returns greatly increases the optimal demand for stock. The role of nominal bonds in longtermport folios depends on the importance of real interest rate risk relative to other sources of risk. We extend the analysis to consider longterm inflationindexed bonds and find that these bonds greatly increase the utility of conservative investors, who should hold large positions when they are available
Foreign currency for longterm investors by John Y Campbell (
Book
)
18
editions published
in
2002
in
English
and held by
68
libraries
worldwide
Conventional wisdom holds that conservative investors should avoid exposure to foreign currency risk. Even if they hold foreign equities, they should hedge the currency exposure of these positions and should hold only domestic Treasury bills. This paper argues that the conventional wisdom may be wrong for longterm investors. Domestic bills are risky for longterm investors, because real interest rates vary over time and bills must be rolled over at uncertain future interest rates. This risk can be hedged by holding foreign currency if the domestic currency tends to depreciate when the domestic real interest rate falls, as implied by the theory of uncovered interest parity. Empirically this effect is important and can lead conservative longterm investors to hold more than half their wealth in foreign currency
Consumption and portfolio decisions when expected returns are time varying by John Y Campbell (
Book
)
18
editions published
between
1996
and
1998
in
English
and held by
66
libraries
worldwide
This paper proposes and implements a new approach to a classic unsolved problem in financial economics: the optimal consumption and portfolio choice problem of a longlived investor facing timevarying investment opportunities. The investor is assumed to be infinitelylived, to have recursive EpsteinZinWeil utility, and to choose in discrete time between a riskless asset with a constant return, and a risky asset with constant return variance whose expected log return follows and AR(1) process. The paper approximates the choice problem by loglinearizing the budget constraint and Euler equations, and derives an analytical solution to the approximate problem. When the model is calibrated to US stock market data it implies that intertemporal hedging motives greatly increase, and may even double, the average demand for stocks by investors whose riskaversion coefficients exceed one
Optimal portfolio choice for longhorizon investors with nontradable labor income by Luis M Viceira (
Book
)
11
editions published
in
1999
in
English
and held by
52
libraries
worldwide
This paper analyzes optimal portfolio decisions of longhorizon investors with undiversifiable labor income risk and exogenous expected retirement and lifetime horizons. It shows that the fraction of savings optimally invested in stocks is unambiguously larger for employed investors than for retired investors when labor income risk is uncorrelated with stock return risk. This result provides support for the popular recommendation by investment advisors that employed investors should invest in stocks a larger proportion of their savings than retired investors. This paper also examines the effect of increasing labor income risk on savings and portfolio choice and finds that, when labor income risk is independent of stock market risk, a meanpreserving increases in the variance of labor income growth increases the investor's willingness to save and reduce her willingness to hold the risky asset in her portfolio. A sensible calibration of the model shows that savings are relatively more responsive to changes in labor income risk than portfolio demands. Positive correlation between labor income innovations and unexpected asset returns also reduces the investor's willingness to hold the risky asset, because of its poor properties as a hedge against unexpected declines in labor income. This paper also provides intuition on the peculiar form of optimal portfolio choice of very young investors predicted by the standard lifecycle model
The term structure of the riskreturn tradeoff by John Y Campbell (
Book
)
13
editions published
in
2005
in
English
and held by
43
libraries
worldwide
"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 riskreturn tradeoff of bonds, stocks, and cash across investment horizons, thus creating a 'term structure of the riskreturn 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 Tbills across investment horizons"National Bureau of Economic Research web site
Optimal value and growth tilts in longhorizon portfolios by Jakub W Jurek (
Book
)
18
editions published
between
2005
and
2006
in
English
and held by
36
libraries
worldwide
We develop an analytical solution to the dynamic portfolio choice problem of an investor with utility defined over wealth at a terminal horizon who faces an investment opportunity set with timevarying risk premia, real interest rates and inflation. The variation in investment opportunities is captured by a flexible vector autoregressive parameterization, which readily accommodates a large number of assets and state variables. We find that the optimal dynamic portfolio strategy is an affine function of the vector of state variables describing investment opportunities, with coefficients that are a function of the investment horizon. We apply our method to the optimal portfolio choice problem of an investor who can choose between value and growth stock portfolios, and among these equity portfolios plus bills and bonds
The excess burden of government indecision by Francisco J Gomes (
Book
)
10
editions published
in
2007
in
English
and held by
28
libraries
worldwide
Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6 percent of the agent's economic resources. This is a significant distortion in of itself. It's also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income
Global currency hedging by John Y Campbell (
Book
)
12
editions published
between
2007
and
2009
in
English
and held by
20
libraries
worldwide
This paper considers the risk management problem of an investor who holds a diversified portfolio of global equities or bonds and chooses long or short positions in currencies to manage the risk of the total portfolio. Over the period 19752005, we find that a riskminimizing global equity investor should short the Australian dollar, Canadian dollar, Japanese yen, and British pound but should hold long positions in the US dollar, the euro, and the Swiss franc. The resulting currency position tends to rise in value when equity markets fall. This strategy works well for investment horizons of one month to one year. In the past 15 years the riskminimizing demand for the dollar appears to have weakened slightly, while demands for the euro and Swiss franc have strengthened. These changes may reflect the growing role for the euro as a reserve currency in the international financial system. The riskminimizing currency strategy for a global bond investor is close to a full currency hedge, with a modest long position in the US dollar. Riskreducing currencies have had lower average returns during our sample period, but the difference in average returns is smaller than would be implied by the global CAPM given the historical equity premium
Optimal lifecycle investing with flexible labor supply : a welfare analysis of lifecycle funds by Francisco J Gomes (
Book
)
9
editions published
in
2008
in
English
and held by
16
libraries
worldwide
We investigate optimal consumption, asset accumulation and portfolio decisions in a realistically calibrated lifecycle model with flexible labor supply. Our framework allows for wage rate uncertainly, variable labor supply, social security benefits and portfolio choice over safe bonds and risky equities. Our analysis reinforces prior findings that equities are the preferred asset for young households, with the optimal share of equities generally declining prior to retirement. However, variable labor materially alters preretirement portfolio choice by significantly raising optimal equity holdings. Using this model, we also investigate the welfare costs of constraining portfolio allocations over the life cycle to mimic popular default investment choices in definedcontribution pension plans, such as stable value funds, balanced funds, and lifecycle (or target date) funds. We find that lifecycle funds designed to match the risk tolerance and investment horizon of investors have small welfare costs. All other choices, including lifecycle funds which do not match investors' risk tolerance, can have substantial welfare costs
Inflation bets or deflation hedges : the changing risks of nominal bonds by John Y Campbell (
Book
)
11
editions published
between
2009
and
2013
in
English
and held by
11
libraries
worldwide
The covariance between US Treasury bond returns and stock returns has moved considerably over time. While it was slightly positive on average in the period 19532005, it was particularly high in the early 1980's and negative in the early 2000's. This paper specifies and estimates a model in which the nominal term structure of interest rates is driven by five state variables: the real interest rate, risk aversion, temporary and permanent components of expected inflation, and the covariance between nominal variables and the real economy. The last of these state variables enables the model to fit the changing covariance of bond and stock returns. Log nominal bond yields and term premia are quadratic in these state variables, with term premia determined mainly by the product of risk aversion and the nominalreal covariance. The concavity of the yield curve  the level of intermediateterm bond yields, relative to the average of short and longterm bond yields  is a good proxy for the level of term premia. The nominalreal covariance has declined since the early 1980's, driving down term premia
Understanding inflationindexed bond markets by John Y Campbell (
Book
)
9
editions published
in
2009
in
English
and held by
8
libraries
worldwide
This paper explores the history of inflationindexed bond markets in the US and the UK. It documents a massive decline in longterm real interest rates from the 1990's until 2008, followed by a sudden spike in these rates during the financial crisis of 2008. Breakeven inflation rates, calculated from inflation indexed and nominal government bond yields, stabilized until the fall of 2008, when they showed dramatic declines. The paper asks to what extent shortterm real interest rates, bond risks, and liquidity explain the trends before 2008 and the unusual developments in the fall of 2008. Low inflationindexed yields and high shortterm volatility of inflationindexed bond returns do not invalidate the basic case for these bonds, that they provide a safe asset for longterm investors. Governments should expect inflationindexed bonds to be a relatively cheap form of debt financing going forward, even though they have offered high returns over the past decade
Monetary policy drivers of bond and equity risks by John Y Campbell (
Archival Material
)
9
editions published
between
2013
and
2015
in
English
and held by
6
libraries
worldwide
The exposure of US Treasury bonds to the stock market has moved considerably over time. While it was slightly positive on average in the period 19602011, it was unusually high in the 1980s and negative in the 2000s, a period during which Treasury bonds enabled investors to hedge macroeconomic risks. This paper explores the effects of monetary policy parameters and macroeconomic shocks on nominal bond risks, using a New Keynesian model with habit formation and discrete regime shifts in 1979 and 1997. The increase in bond risks after 1979 is attributed primarily to a shift in monetary policy towards a more antiinflationary stance, while the more recent decrease in bond risks after 1997 is attributed primarily to a renewed emphasis on output stabilization and an increase in the persistence of monetary policy. Endogenous responses of bond risk premia amplify these effects of monetary policy on bond risks
The euro as a reserve currency for global investors by Luis M Viceira (
Book
)
4
editions published
in
2010
in
English
and held by
6
libraries
worldwide
InflationIndexed Bonds and the Expectations Hypothesis by Carolin E Pflueger (
Book
)
9
editions published
in
2011
in
English
and held by
5
libraries
worldwide
This paper empirically analyzes the Expectations Hypothesis (EH) in inflationindexed (or real) bonds and in nominal bonds in the US and in the UK. We strongly reject the EH in inflationindexed bonds, and also confirm and update the existing evidence rejecting the EH in nominal bonds. This rejection implies that the risk premium on both real and nominal bonds varies predictably over time. We also find strong evidence that the spread between the nominal and the real bond risk premium, or the breakeven inflation risk premium, also varies over time. We argue that the time variation in real bond risk premia mostly likely reflects both a changing real interest rate risk premium and a changing liquidity risk premium, and that the variability in the nominal bond risk premia reflects a changing inflation risk premium. We estimate significant time series variability in the magnitude and sign of bond risk premia
An empirical decomposition of risk and liquidity in nominal and inflationindexed government bonds by Carolin E Pflueger (
Book
)
9
editions published
in
2011
in
English
and held by
5
libraries
worldwide
This paper decomposes the excess return predictability in inflationindexed and nominal government bonds into effects from liquidity, market segmentation, real interest rate risk and inflation risk. We estimate a large and variable liquidity premium in US Treasury Inflation Protected Securities (TIPS) from the comovement of breakeven inflation with liquidity proxies. The liquidity premium is around 70 basis points in normal times, but much larger during the early years of TIPS issuance and during the height of the financial crisis in 20082009. The liquidity premium explains the high excess returns on TIPS as compared to nominal Treasuries over the period 19992009. Liquidityadjusted breakeven inflation appears stable, suggesting stable inflation expectations over our sample period. We find predictability in both inflationindexed bond excess returns and in the spread between nominal and inflationindexed bond excess returns even after adjusting for liquidity, providing evidence for both timevarying real interest rate risk premia and timevarying inflation risk premia. Liquidity appears uncorrelated with real interest rate and inflation risk premia. We test whether bond return predictability is due to segmentation between nominal and inflationindexed bond markets but find no evidence in either the US or in the UK
Bond risk, bond return volatility, and the term structure of interest rates by Luis M Viceira (
Book
)
3
editions published
in
2007
in
English
and held by
4
libraries
worldwide
This paper explores time variation in bond risk, as measured by the covariation of bond returns with stock returns and with consumption growth, and in the volatility of bond returns. A robust stylized fact in empirical finance is that the spread between the yield on longterm bonds and shortterm bonds forecasts positively future excess returns on bonds at varying horizons, and that the shortterm nominal interest rate forecasts positively stock return volatility and exchange rate volatility. This paper presents evidence that movements in both the shortterm nominal interest rate and the yield spread are positively related to changes in subsequent realized bond risk and bond return volatility. The yield spread appears to proxy for business conditions, while the short rate appears to proxy for inflation and economic uncertainty. A decomposition of bond betas into a real cash flow risk component, and a discount rate risk component shows that yield spreads have offsetting effects in each component. A widening yield spread is correlated with reduced cashflow (or inflationary) risk for bonds, but it is also correlated with larger discount rate risk for bonds. The short rate forecasts only the discount rate component of bond beta
Strategic asset allocation in a continuoustime var model by John Y Campbell (
Book
)
5
editions published
between
2002
and
2003
in
English
and held by
4
libraries
worldwide
This note derives an approximate solution to a continuoustime intertemporal portfolio and consumption choice problem. The problem is the continuoustime equivalent of the discretetime problem studied by Campbell and Viceira (1999), in which the expected excess return on a risky asset follows an AR(1)process, while the riskless interest rate is constant. The note also shows how to obtain continuoustime parameters that are consistent with discretetime econometric estimates. The continuoustime solution is numerically close to that of Campbell and Viceira and has the property that conservative longterm investors have a large positive intertemporal hedging demand for stocks
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Alternative Names
Viceira, L. M. Viciera, Luis M. ビセイラ, ルイス・M
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