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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
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.
0305-9049
42-61
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504
Olmo, Jose
706f68c8-f991-4959-8245-6657a591056e
Gonzalo, Jesus
57637a0a-f7da-417f-9d2e-3a33a7082504

Olmo, Jose and Gonzalo, Jesus (2019) Differences between short and long term risk aversion: an optimal asset allocation perspective. Oxford Bulletin of Economics and Statistics, 81 (1), 42-61. (doi:10.1111/obes.12247).

Record type: Article

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.

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Dynamicriskaversion Gonzalo Olmo OBES post - Accepted Manuscript
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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: https://eprints.soton.ac.uk/id/eprint/419736
ISSN: 0305-9049
PURE UUID: 0ba7ec65-4928-4458-ac9e-308f3dbd6734
ORCID for Jose Olmo: ORCID iD orcid.org/0000-0002-0437-7812

Catalogue record

Date deposited: 20 Apr 2018 16:30
Last modified: 27 Jul 2019 00:31

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