Differences between short and long term risk aversion: an optimal asset allocation perspective
Differences between short and long term risk aversion: an optimal asset allocation perspective
This paper studies the long-term asset allocation problem of an investor with different risk aversion attitudes to the short and the long term. We characterize investor's preferences with a utility function exhibiting a regime shift in risk aversion at some point of the multiperiod investment horizon that is estimated using threshold nonlinearity methods. Our empirical results for a portfolio of cash, bonds and stocks suggest that long-term risk aversion is higher than short-term risk aversion and increases with the investment horizon. The exposure of the investment portfolio from stocks to bonds and cash increases with the degree of risk aversion.
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Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
February 2019
Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Gonzalo, Jesus and Olmo, Jose
(2019)
Differences between short and long term risk aversion: an optimal asset allocation perspective.
Oxford Bulletin of Economics and Statistics, 81 (1), .
(doi:10.1111/obes.12247).
Abstract
This paper studies the long-term asset allocation problem of an investor with different risk aversion attitudes to the short and the long term. We characterize investor's preferences with a utility function exhibiting a regime shift in risk aversion at some point of the multiperiod investment horizon that is estimated using threshold nonlinearity methods. Our empirical results for a portfolio of cash, bonds and stocks suggest that long-term risk aversion is higher than short-term risk aversion and increases with the investment horizon. The exposure of the investment portfolio from stocks to bonds and cash increases with the degree of risk aversion.
Text
Dynamicriskaversion Gonzalo Olmo OBES post
- Accepted Manuscript
More information
Accepted/In Press date: 20 March 2018
e-pub ahead of print date: 23 July 2018
Published date: February 2019
Identifiers
Local EPrints ID: 419736
URI: http://eprints.soton.ac.uk/id/eprint/419736
ISSN: 0305-9049
PURE UUID: 0ba7ec65-4928-4458-ac9e-308f3dbd6734
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Date deposited: 20 Apr 2018 16:30
Last modified: 16 Mar 2024 06:28
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Author:
Jesus Gonzalo
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