Discrete-Time Financial Planning Models Under Loss-Averse Preferences

Arjen Siegmann and Andre Lucas

Operations Research, 2005, vol. 53, issue 3, 403-414

Abstract: We consider a dynamic asset allocation problem formulated as a mean-shortfall model in discrete time. A characterization of the solution is derived analytically under general distributional assumptions for serially independent risky returns. The solution displays risk taking under shortfall, as well as a specific form of time diversification. Also, for a representative stock-return distribution, risk taking increases monotonically with the number of decision moments given a fixed horizon. This is related to the well-known casino effect arising in a downside-risk and expected return framework. As a robustness check, we provide results for a modified objective with a quadratic penalty on shortfall. An analytical solution for a single-stage setup is derived, and numerical results for the two-period model and time diversification are provided.

Keywords: multistage stochastic programming; downside risk; asset/liability management; time diversification (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (10)

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