Dynamic Asset Allocation with Learning

This paper shows that when an investor optimally rebalances her portfolio, learning about the parameter of the return process still induces a large negative hedging demand even after observing 83 years of asset market data. An investor with a 5-year investment horizon decreases the percentage of wealth she allocates to the stock index by over 20 percent when she takes learning into account. Furthermore, this paper shows that the initial estimation sample length needs to be at least 500 years in order for the effect of learning to vanish