Portfolio Allocation for European Markets withPredictability and Parameter Uncertainty

We implement a long-horizon static and dynamic portfolio allocation involvinga risk-free and a risky asset. This model is calibrated at a quarterly frequencyfor ten European countries. We also use maximum-likelihood estimates andBayesian estimates to account for parameter uncertainty. We nd that formost European countries the dividend-price ratio and ination have predictivepower. For countries where returns are predictable, we demonstrate out-of-sample economic signicance for the long-horizon allocation. Parameteruncertainty plays a second-order role, dominated by strong variation in thedynamic allocation itself induced by large variations in the state variables.The market timing appears economically relevant for many countries.[...]