Higher-order risk preferences, constant relative risk aversion and the optimal portfolio allocation

Trino Ñíguez Grau, Ivan Paya (), David Peel and Javier Perote

No 1520, Working Papers from Banco de España

Abstract: We derive the conditions for the optimal portfolio choice within a constant relative risk aversion type of utility function considering alternative probability distributions that are able to capture the asymmetric and leptokurtic features of asset returns. We illustrate the role —beyond risk aversion— played by higher-order moments in the optimal decision to form a portfolio of risky assets. In particular, we show that higher-order risk attitudes such as prudence and temperance associated with the third and fourth moments of the distribution define different optimal portfolios than those constrained under risk aversion.

Keywords: : decision analysis; risk management; higher-order moments and preferences; portfolio choice; weighted generalized beta two distribution. (search for similar items in EconPapers)
JEL-codes: C16 D81 G11 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2015-07
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Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:bde:wpaper:1520

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