Nonmyopic Optimal Portfolios in Viable Markets

We provide a representation for the nonmyopic optimal portfolio of an agentconsuming only at the terminal horizon when the single state variable follows ageneral diusion process and the market consists of one risky asset and a risk-freeasset. The key term of our representation is a new object that we call the \rateof macroeconomic uctuation" whose properties are fundamental for the portfoliodynamics.We show that, under natural cyclicality conditions, (i) the agent's hedgingdemand is positive (negative) when the product of his prudence and risk toleranceis below (above) 2 and (ii) the portfolio weights decrease in risk aversion. Weapply our results to study a general continuous-time capital asset pricing modeland show that under the same cyclicality conditions, the market price of risk iscountercyclical and the price of the risky asset exhibits excess volatility.[...]