Intertemporal Portfolio Choice under Multiple Types of Event Risks

This paper examines the effects of major event risk on the optimal intertemporal asset allocation in a continuous time setting. We start by firstly proposing a general framework in which we model three types of event risks: i) the individual jumps of asset prices, ii) the individual jumps of the underlying states; and iii) the joint jumps. Most previous papers in the portfolio choice literature can be included in the framework as special cases. We next illustrate the use of this framework in three examples and find i) hedging demand due to jumps are in general several times larger than that due to diffusions; ii) multiple types of jumps are not only supported by the US stock market data but also play different roles in agents' asset allocation. In particular, jumps in state induce little and negative hedging components under the individual state jumps and the joint jumps, respectively.