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An incentive problem of risk balancing in portfolio choices

Jin-Ray Lu, Chih-Chiang Hwang, Min-Luan Liu and Chien-Yi Lin

The Quarterly Review of Economics and Finance, 2016, vol. 61, issue C, 192-200

Abstract: This study provides a new perspective on the incentive of risk balancing by examining how investors adjust their portfolio weights in response to changes in volatility risk, market risk, and liquidity risk. We find that investors have motives to mitigate the disproportionate impacts of these potential risks. Investors significantly reduce the weight of stock they hold, as opposed to increasing the weight of stock, to offset the impacts of the three potential risks, even though one risk has diversification benefits, while other risks generate adverse impacts. Moreover, we conclude that investors have a desire to greatly reduce the weight of stock, given some scenarios of a lower-growth stock, a higher asset correlation, a more risk-averse investor, and a greater intensity of crisis events.

Keywords: Portfolio selection; Risk sensitivities; Hedging demand (search for similar items in EconPapers)
JEL-codes: G11 G32 (search for similar items in EconPapers)
Date: 2016
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