A Top-Down Method for Long-Term Investing

55 Pages Posted: 18 Feb 2021

See all articles by Dietmar Leisen

Dietmar Leisen

Johannes Gutenberg University Mainz - Department of Banking

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group; University of Technology Sydney, School of Mathematical and Physical Sciences; Financial Research Network (FIRN)

Date Written: February 3, 2021

Abstract

This paper bases long-term investing on a tradeable stochastic discount factor (SDF), relates it to the growth optimal portfolio and argues for a top-down method, where modeling efforts are directed at capturing its long-run dynamics in a generalized setting. This differs from the common, cumbersome bottom-up method of modeling many risky securities in the marketplace. Various optimal portfolio strategies can be implemented efficiently using fractional expectations of the SDF. This paper illustrates empirically for the US stock market that the proposed method leads to higher wealth, higher returns on investment and higher long-term utility levels.

Keywords: Stochastic discount factor, optimal portfolio, growth optimal portfolio, long-term investing

JEL Classification: G11, G13

Suggested Citation

Leisen, Dietmar P. J. and Platen, Eckhard, A Top-Down Method for Long-Term Investing (February 3, 2021). Available at SSRN: https://ssrn.com/abstract=3778852 or http://dx.doi.org/10.2139/ssrn.3778852

Dietmar P. J. Leisen (Contact Author)

Johannes Gutenberg University Mainz - Department of Banking ( email )

Jakob-Welder-Weg 9
Mainz, D-55099
Germany
++49-6131-39 22097 (Phone)
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HOME PAGE: http://www.finserv.bwl.uni-mainz.de/index_ENG.php

Eckhard Platen

University of Technology, Sydney (UTS) - Finance Discipline Group ( email )

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Sydney, NSW 2007, 2007
Australia
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HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=90

University of Technology Sydney, School of Mathematical and Physical Sciences ( email )

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Australia
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Financial Research Network (FIRN)

C/- University of Queensland Business School
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Queensland
Australia

HOME PAGE: http://www.firn.org.au

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