Review of Quantitative Finance and Accounting, 20: 207–243, 2003 ©C 2003 Kluwer Academic Publishers. Manufactured in The Netherlands. Jumps and Dynamic Asset Allocation

Abstract. This paper analyzes the optimal dynamic asset allocation problem in economies with infrequent events and where the investment opportunities are stochastic and predictable. Analytical approximations are obtained, with which a thorough comparative study is performed on the impacts of jumps upon the dynamic decision. The model is then calibrated to the U.S. equity market. The comparative analysis and the calibration exercise both show that jump risk not only makes the investor’s allocation more conservative overall but also makes her dynamic portfolio rebalancing less dramatic over time. Key words: asset allocation, jumps, non-normality, time-varying investment opportunities, predictabilit