Long-term optimal portfolio allocation under dynamic horizon-specific risk aversion
Jose Olmo
Authors registered in the RePEc Author Service: Jesus Gonzalo
UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de EconomÃa
Abstract:
This paper studies the long-term asset allocation problem of an individual with risk aversion coefficient that i) varies with economic conditions, and ii) exhibits different risk attitudes towards the short and the long term. To do this, we propose a parametric linear portfolio policy that accommodates an arbitrarily large number of assets in the portfolio and a piecewise linear risk aversion coefficient. These specifications of the optimal portfolio policy and individual's risk aversion allow us to apply GMM methods for parameter estimation and testing. Our empirical results provide statistical evidence of the existence of a short-term and a long-term regime in the individual's risk aversion. Long-term risk aversion is always higher than short-term risk aversion, and it is more statistically significant as the investment horizon increases. The analysis of the optimal portfolio weights also suggests that the allocation to stocks and bonds is strongly negatively correlated, with the magnitude of the portfolio weights and risk aversion coefficients increasing as the investment horizon expands.
Keywords: Intertemporal; portfolio; theory; Parametric; portfolio; policies; Dynamic; risk; aversion; Threshold; nonlinearity; tests (search for similar items in EconPapers)
JEL-codes: E32 E52 E62 (search for similar items in EconPapers)
Date: 2016-09-01
New Economics Papers: this item is included in nep-mac and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)
Downloads: (external link)
https://e-archivo.uc3m.es/rest/api/core/bitstreams ... d1f4224c1e12/content (application/pdf)
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:cte:werepe:23599
Access Statistics for this paper
More papers in UC3M Working papers. Economics from Universidad Carlos III de Madrid. Departamento de EconomÃa
Bibliographic data for series maintained by Ana Poveda (biblioteca@db.uc3m.es).