Asset Pricing.

The NBER's Program on Asset Pricing met in Cambridge on November 3. Jacob Boudoukh, NBER and New York University, and Jiang W. Wang, NBER and MIT, organized the program and chose the following papers for discussion:

John Y. Campbell and Luis M. Viceira, NBER and Harvard University, and Lewis Chan, Hong Kong University of Science and Technology, "A Multivariate Model of Strategic Asset Allocation"

Discussant: Anthony Lynch, New York University

Joao F. Gomes, Leonid Kogan, and Lu Zhang, University of Pennsylvania, "Equilibrium Cross Section of Returns"

Discussant: Jonathan Berk, NBER and University of California, Berkeley

Qiang Dai, New York University, "From Equity Premium Puzzle to Expectations Puzzle: A General Equilibrium Production Economy of Stochastic Habit Formation"

Discussant: John H. Cochrane, NBER and University of California, Los Angeles

Nicholas C. Barberis, NBER and University of Chicago, and Ming Huang, Stanford University, "Mental Accounting, Loss Aversion, and Individual Stock Returns"

Discussant: John Heaton, NBER and University of Chicago

Erzo G. J. Luttmer and Thomas Mariotti, London School of Economics, "Subjective Discounting in an Exchange Economy"

Discussant: Stanley Zin, NBER and Carnegie Mellon University

Michael W. Brandt, NBER and University of Pennsylvania, Qi Zeng, University of Pennsylvania, and Lu Zhang, "Equilibrium Stock Return Dynamics under Alternative Rules of Learning about Hidden States"

Discussant: Pietro Veronesi, University of Chicago

Campbell, Chan, and Viceira show how the predictability of asset returns can affect the portfolio choices of long-lived investors who value wealth not for its own sake but for the consumption it can support. The authors develop an approximate solution method for the optimal consumption-and-portfolio-choice problem of an infinitely-lived investor with Epstein-Zin utility who faces a set of asset returns described by a vector autoregression in returns and state variables. Their empirical estimates, based on long-run annual and postwar quarterly U.S. data, suggest that the predictability of stock returns greatly increases the optimal demand for stocks. Nominal bonds have only a small role in optimal long-term portfolios. The authors extend the analysis to consider long-term inflation-indexed bonds and find that extremely conservative investors should hold large positions in these bonds when they are available.

Gomes, Kogan, and Zhang explicitly link expected stock returns...