Intertemporal portfolio allocation and hedging demand: an application to South Africa

Abstract

This paper analyses the intertemporal hedging demand for stocks and bonds in South Africa, the United Kingdom and the United States. The analysis is done using an approximate solution method for the optimal consumption and wealth portfolio problem of an infinitely long-lived investor. Investors are assumed to have Epstein-Zin-Weil-type preferences and face asset returns described by a first-order vector autoregression in returns and state variables. The results show that the mean intertemporal hedging demands for stocks are considerably smaller in SA than in the UK or the US, whilst the mean intertemporal hedging demand for bonds are not significantly different from zero in any of the countries considered. Furthermore, it is found that stocks in the US and the UK do not present a useful hedging opportunity for an investor in SA, nor do SA stocks present a useful hedging opportunity for investors from the UK or the US.

Keywords:

• intertemporal hedging demand
• multi-period portfolio choice
• return predictability
• South Africa
• portfolio allocation
• financial markents

JEL Classification:

• C32
• G11

Additional information

Notes on contributors

Esti Van Wyk de Vries

Esti VAN WYK DE VRIES recently obtained her MCom(Econometrics) degree from the University of Pretoria. She holds a BCom(Hons) (Econometrics) degree from the same University. Her academic interests include Financial economics and Applied Econometrics.

Rangan Gupta

Rangan GUPTA is a Professor at the Department of Economics, University of Pretoria. He completed his PhD in May 2005 from the Department of Economics, University of Connecticut. He joined the Department of Economics, University of Pretoria, as a Senior Lecturer in August 2005 and got promoted to an Associate Professor in July 2007. He secured His BSc (Honours) degree from the R.K.M.R. College, Narendrapur, and the MSc degree from the University of Calcutta. His academic interests are mainly Monetary Theory and Policy, Business Cycles and Time Series Econometrics. He has published widely in international and domestic refereed journals.

Reneé Van Eyden

Reneé VAN EYDEN currently fills the position of Associate Professor in the Department of Economics at the University of Pretoria. She holds the degrees BSc(Hons) (Computer Science), MBA and DCom(Econometrics) from the same University. Her academic interests include Applied Econometrics and Macroeconometric Modelling.