Optimal portfolio choice under loss aversion

Arjan B. Berkelaar, Roy Kouwenberg, Thierry Post

Research output: Contribution to journalReview article

137 Citations (Scopus)

Abstract

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.

Original languageEnglish
Pages (from-to)973-987
Number of pages15
JournalReview of Economics and Statistics
Volume86
Issue number4
DOIs
Publication statusPublished - Nov 2004
Externally publishedYes

Fingerprint

investor
stock market
insurance
assets
planning
Loss aversion
Investors
Optimal portfolio choice
market

ASJC Scopus subject areas

  • Social Sciences (miscellaneous)
  • Economics and Econometrics

Cite this

Optimal portfolio choice under loss aversion. / Berkelaar, Arjan B.; Kouwenberg, Roy; Post, Thierry.

In: Review of Economics and Statistics, Vol. 86, No. 4, 11.2004, p. 973-987.

Research output: Contribution to journalReview article

Berkelaar, Arjan B. ; Kouwenberg, Roy ; Post, Thierry. / Optimal portfolio choice under loss aversion. In: Review of Economics and Statistics. 2004 ; Vol. 86, No. 4. pp. 973-987.
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