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Limiting losses may be injurious to your wealth

Robert R. Grauer

Journal of Banking & Finance, 2013, vol. 37, issue 12, 5088-5100

Abstract: Theory tells us that if return distributions are independent over time, an expected utility maximizing logarithmic-utility investor will almost surely accumulate the most long-run wealth. This paper examines the robustness of the result. Specifically, it examines the expected and unexpected long-run and short-run consequences of imposing Value at Risk and other loss constraints on power-utility investors with a numerical example and empirically in an asset-allocation setting covering the 1934–2008 period. In addition, it examines the expected and unexpected long-run consequences of imposing Conditional Value at Risk constraints on power-utility and prospect-theory (kinked linear-utility) investors.

Keywords: Power-utility and prospect-theory portfolios; Solvency; Portfolio-insurance; Value-at-risk and conditional-value-at-risk constraints (search for similar items in EconPapers)
JEL-codes: G11 (search for similar items in EconPapers)
Date: 2013
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Handle: RePEc:eee:jbfina:v:37:y:2013:i:12:p:5088-5100