McManus, Ian, Ap Gwilym, Owain and Thomas, Stephen
Prospective utility and optimal asset allocation for the UK: 1803-1995
International Journal of Behavioural Accounting and Finance, 1, (2), .
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The equity risk premium has attracted considerable debate and various proposed explanations. We re-examine one approach based on myopic loss aversion, while incorporating time variation in returns distributions. We identify optimal asset allocations across a two-century period for the UK, in the context of a range of plausible investment evaluation periods. We demonstrate that both the frequency of evaluation which achieves indifference between equities and bonds, and the optimal asset allocation profile, vary significantly over time. Although equities dominate for long periods, it is evident that periods of low inflation lead to the prominence of bonds in optimal allocations.
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