Myopic loss aversion and margin of safety: the risk of value investing

Kuan Xu and Gordon Fisher

Quantitative Finance, 2006, vol. 6, issue 6, 481-494

Abstract: This paper examines the risk of value investing from the point of view of a myopic loss-averse investor holding a diversified portfolio and relying on infrequent portfolio rebalancing. This closely resembles purchasing a large portfolio, such as those created by BARRA, and following a buy-and-hold investment strategy. In these circumstances, which portfolio, value or growth, is riskier to a myopic loss-averse investor? To facilitate analysis, a myopic loss ranking and a corresponding statistical procedure are developed and applied to investment-style data provided by BARRA. The paper qualifies the conditions under which value investing is more risky in North American financial markets.

Keywords: Myopic loss aversion; Stochastic dominance; Statistical test; Investment style; Value and growth; Value-index investment (search for similar items in EconPapers)
Date: 2006
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DOI: 10.1080/14697680600780934

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