文档介绍：THE JOURNAL OF FINANCE • VOL. LIV, NO. 5 • OCTOBER 1999
Estimating Portfolio and Consumption Choice:
A Conditional Euler Equations Approach
MICHAEL W. BRANDT*
ABSTRACT
This paper develops a nonparametric approach to examine how portfolio and con-
sumption choice depends on variables that forecast time-varying investment op-
portunities. I estimate single-period and multiperiod portfolio and consumption
rules of an investor with constant relative risk aversion and a one-month to 20-
year horizon. The investor allocates wealth to the NYSE index and a 30-day Trea-
sury bill. I find that the portfolio choice varies significantly with the dividend
yield, default premium, term premium, and lagged excess return. Furthermore,
the optimal decisions depend on the investor’s horizon and rebalancing frequency.
HOW DOES PORTFOLIO AND CONSUMPTION CHOICE depend on variables that fore-
cast time-varying investment opportunities? Prior studies that address this
question assume a statistical model relating returns to forecasting variables
and solve for an investor’s portfolio and consumption choice using estimates
of the implied conditional distribution of returns. As a result, their answers
are shaped as much by modeling assumptions as by the data. An incorrect
model of how returns relate to forecasting variables can yield inconsistent
portfolio and consumption choice estimates and invalid inferences. This pa-
per develops and implements an econometric approach that is robust to such
model misspecification. Sample analogues of the conditional Euler equa-
tions, the first-order conditions of the investor’s expected utility maximiza-
tion, yield consistent estimates shaped by the data.
I modify the method of moments approach of Hansen and Singleton ~1982!.
I fix the parameters of an individual investor’s utility function and estimate
the optimal wealth and consumption process, and thereby the investor’s port-
folio and consumption rules, from s