Uncertainty, and Intertemporal Hedging: An Exploratory Study for the Swiss Stock Market

This paper examines how the evidence of stock market predictability affects optimal portfolio choice for buy-and-hold and dynamic investors with different planning horizons. As in Barberis (2000), particular attention is paid to estimation risk, i.e., uncertainty about the true values of the predictive regression parameters. The empirical analysis for the Swiss stock market shows that there is enough predictability in returns to make shortterm buy-and-hold investors time the market. However, optimal weights for long-term buy-and-hold investors are generally not very sensitive tothe initial value of the predictive variable, particularly when parameter uncertainty is taken into account. In general, there is no horizon effect and the intertemporal hedging demand is empirically negligible, too. In general, dynamic investors who follow a dynamic rebalancing strategy do not hold more stocks and do not time the market more aggressively than myopic buy-and-hold investors. The Swiss stock market does not provide an intertemporal hedge to changes in investment opportunities. Consequently, common definitions for tactical asset allocation strategies as myopic short-term strategies seem to be empirically justified.