2004-11-01
Optimal portfolio choice under loss aversion
Publication
Publication
The Review of Economics and Statistics , Volume 86 - Issue 4 p. 973- 987
This paper analyzes the optimal investment strategy for loss-averse investors, assuming a complete market and general Ito processes for the asset prices. The loss-averse investor follows a partial portfolio insurance strategy. When the investor's planning horizon is short (less than 5 years), he or she considerably reduces the initial portfolio weight of stocks compared to an investor with smooth power utility. The empirical section of the paper estimates the level of loss aversion implied by historical U.S. stock market data, using a representative agent model. We find that loss aversion and risk aversion cannot be disentangled empirically.
Additional Metadata | |
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doi.org/10.1162/0034653043125167, hdl.handle.net/1765/57068 | |
The Review of Economics and Statistics | |
Organisation | Erasmus Research Institute of Management |
Berkelaar, A., Kouwenberg, R., & Post, T. (2004). Optimal portfolio choice under loss aversion. The Review of Economics and Statistics (Vol. 86, pp. 973–987). doi:10.1162/0034653043125167 |