CRIF Working Paper No. 02019

Jumps and Dynamic Portfolio Decisions

Title: Jumps and Dynamic Portfolio Decisions

Authors: Liuren Wu (Fordham University)

Contact: wu@fordham.edu

Keywords: Jumps, time-varying investment opportunities, dynamic asset allocation, non-normality, skewness and kurtosis, predictability.

JEL Classification: G11

Abstract: This paper provides a general framework for analyzing optimal dynamic asset allocation problems in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical solutions are obtained, with which I do a thorough comparative study of the impacts of jumps on the dynamic decision. I also calibrate the model to the U.S. equity market and assess the quantitative impacts of jumps under a dynamic environment. I find that jump risk not only makes the investor's allocation more conservative overall but also makes her dynamic portfolio rebalancing less dramatic over time.

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