Autocorrelated Returns and Optimal Intertemporal Portfolio Choice

In recent years it has been shown empirically that stock returns exhibit positive or negative autocorrelation, depending on observation frequency. In this context of autocorrelated returns the present paper is the first to derive an explicit analytical solution to the dynamic portfolio problem of an individual agent saving for retirement (or other change of status, like the purchase of a house or starting college). Using a normal ARMA(1,1) …