Stocks for the log-run and constant relative risk aversion preferences

Moshe Levy ()

European Journal of Operational Research, 2019, vol. 277, issue 3, 1163-1168

Abstract: Almost Stochastic Dominance implies that stocks are preferred over bonds in the long-run by all preferences with bounded marginal utility. Unfortunately, this analysis excludes the very central Constant Relative Risk Aversion (CRRA) preferences, which have unbounded marginal utility. We derive a simple closed-form solution for the portfolio-choice problem of CRRA investors which, with the empirical parameters, implies that stocks are preferred over bonds for all CRRA investors with relative risk aversion smaller than 3.9. As a by-product, the analysis offers an alternative derivation of the continuous-time CAPM, that does not rely on dynamic programming, and allows for ambiguous investment horizons.

Keywords: Finance; Stocks for the long-run; CRRA preferences; Almost Stochastic Dominance; CAPM (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ejores:v:277:y:2019:i:3:p:1163-1168

DOI: 10.1016/j.ejor.2019.03.033

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