Long-term optimal portfolio allocation under dynamic horizon-specific risk aversion

Autor: Gonzalo, Jesús, Olmo, José
Přispěvatelé: Universidad Carlos III de Madrid. Departamento de Economía
Jazyk: angličtina
Rok vydání: 2016
Předmět:
Zdroj: e-Archivo. Repositorio Institucional de la Universidad Carlos III de Madrid
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Popis: This paper studies the long-term asset allocation problem of an individual with risk aversion coefficient that i) varies with economic conditions, and ii) exhibits different risk attitudes towards the short and the long term. To do this, we propose a parametric linear portfolio policy that accommodates an arbitrarily large number of assets in the portfolio and a piecewise linear risk aversion coefficient. These specifications of the optimal portfolio policy and individual's risk aversion allow us to apply GMM methods for parameter estimation and testing. Our empirical results provide statistical evidence of the existence of a short-term and a long-term regime in the individual's risk aversion. Long-term risk aversion is always higher than short-term risk aversion, and it is more statistically significant as the investment horizon increases. The analysis of the optimal portfolio weights also suggests that the allocation to stocks and bonds is strongly negatively correlated, with the magnitude of the portfolio weights and risk aversion coefficients increasing as the investment horizon expands. We acknowledge seminar participants at Southampton-Surrey Econometric Event and Workshop on Financial Econometrics and Structural Breaks in University of Birmingham. Financial support from the Spanish MINECO under grants ECO2013-46395 and MDM 2014-0431, MadEco-CM grant S2015/HUM-3444 and the Bank of Spain ER program is gratefully acknowledged.
Databáze: OpenAIRE