Behaviour finance and estimation risk in stochastic portfolio optimization

Jose Luiz Barros Fernandes, Juan Ignacio Pena and Benjamin Tabak

Applied Financial Economics, 2010, vol. 20, issue 9, 719-738

Abstract: The objective of this article is twofold. The first is to incorporate mental accounting, loss-aversion, asymmetric risk-taking behaviour and probability weighting in a multi-period portfolio optimization for individual investors. While these behavioural biases have previously been identified in the literature, their overall impact during the determination of optimal asset allocation in a multi-period analysis is still missing. The second objective is to account for the estimation risk in the analysis. Considering 26 daily index stock data over the period from 1995 to 2007, we empirically evaluate our model (Behaviour Resample Adjusted Technique-BRATE) against the traditional Markowitz model.

Date: 2010
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Working Paper: Behavior Finance and Estimation Risk in Stochastic Portfolio Optimization (2009)
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DOI: 10.1080/09603100903493211

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