 Optimal asset allocation under linear loss aversionInes Fortin and Jaroslava Hlouskova Journal of Banking & Finance, 2011, vol. 35, issue 11, 2974-2990 Abstract: We study the asset allocation of a linear loss-averse (LA) investor and compare it to the more traditional mean-variance (MV) and conditional value-at-risk (CVaR) investors. First we derive conditions under which the LA problem is equivalent to the MV and CVaR problems and solve analytically the two-asset problem of the LA investor for a risk-free and a risky asset. Then we run simulation experiments to study properties of the optimal LA and MV portfolios under more realistic assumptions. We find that under asymmetric dependence LA portfolios outperform MV portfolios, provided investors are sufficiently loss-averse and dependence is large. Finally, using 13 EU and US assets, we implement the trading strategy of a linear LA investor who reallocates his/her portfolio on a monthly basis. We find that LA portfolios clearly outperform MV and CVaR portfolios and that incorporating a dynamic update of the LA parameters significantly improves the performance of LA portfolios. Keywords: D03; D81; G11; G15; G24; Loss; aversion; Prospect; theory; Portfolio; optimization; MV/CVaR; portfolios; Copula; Investment; strategy (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:35:y:2011:i:11:p:2974-2990 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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