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 language | English |
|---|---|
| Pages (from-to) | 973-987 |
| Number of pages | 15 |
| Journal | Review of Economics and Statistics |
| Volume | 86 |
| Issue number | 4 |
| DOIs | |
| Publication status | Published - Nov 2004 |
| Externally published | Yes |
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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 journal › Review article
}
TY - JOUR
T1 - Optimal portfolio choice under loss aversion
AU - Berkelaar, Arjan B.
AU - Kouwenberg, Roy
AU - Post, Thierry
PY - 2004/11
Y1 - 2004/11
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=11144352254&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=11144352254&partnerID=8YFLogxK
U2 - 10.1162/0034653043125167
DO - 10.1162/0034653043125167
M3 - Review article
VL - 86
SP - 973
EP - 987
JO - Review of Economics and Statistics
JF - Review of Economics and Statistics
SN - 0034-6535
IS - 4
ER -