A Mean-Variance Benchmark
After all these years, it is nonetheless a thrill when an article gets published, in addition to this existence a flake of a personal 24-hour interval on the spider web log (see last post), I can't resist sharing it.
Two stories.
This newspaper started when John Campbell presented "Who should purchase long-term bonds?" (with Luis Viceira, American Economic Review) inwards the belatedly 1990s at the Booth (then, GSB) finance workshop. John pointed out that long term bonds are the riskless property for long-term investors, thus nosotros should construct portfolio theory around indexed perpetuities, non one-month T bills.
I thought, "that's thus obvious!" and, simultaneously, kicking myself, "why didn't I retrieve of that?," a sign of a dandy paper. (I was also inspired past times Jessica Wachter's "Risk Aversion in addition to the Allocation to Long Term Bonds" which came out inwards the Journal of Economic Theory 2003.)
But if indexed perpetuities are the "riskfree asset," in addition to then for sure the claim to the aggregate dividend or consumption stream is the "risky asset," in addition to everyone lies on some form of business betwixt the two. We should live able to depict portfolio theory -- fifty-fifty inwards an intertemporal, dynamic, incomplete-market surroundings -- amongst touchstone mean-variance pictures. Why I'll simply write this downwardly in addition to I'll accept a dandy newspaper inwards a week. xv years later, hither it is. Well, thank yous for the inspiration, John!
You may wonder why the Journal of Finance allowed me page after page of prose earlier getting to the point, in addition to how this seems to massively contradict my ain advice to larn to the facts. Is the JF lax amongst old-timers similar me? No, actually. I sent them a lean draft which simply laid upwards out the theorems. The editor in addition to referees' primary electrical load was that I demand to explicate why this is important. They asked for it, though perhaps non inwards the volume they got!
In the end, though, I retrieve this newspaper functions ameliorate every bit essay than every bit math. It's a "benchmark" because it genuinely is a "parable." Quadratic utility is a terrible approximation for long horizon investing, in addition to yous can't rely on normal distributions either. So, give thank yous you Journal of Finance (Cam Harvey editor in addition to anonymous referees) for letting me sneak inwards a rather practiced (I think) essay on portfolio theory inwards the guise of a paper!
I promise the article inspires someone to figure out how to brand a payoff-centered portfolio theory practically useful too. (Ph. D. students, earlier yous essay to apply it, read my endless appendix "long run mean-variance analysis inwards a diffusion environment," detailing all my failed attempts.)
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