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Differences Between Short‐ and Long‐Term Risk Aversion: An Optimal Asset Allocation Perspective
Author(s) -
Gonzalo Jesus,
Olmo Jose
Publication year - 2019
Publication title -
oxford bulletin of economics and statistics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.131
H-Index - 73
eISSN - 1468-0084
pISSN - 0305-9049
DOI - 10.1111/obes.12247
Subject(s) - risk aversion (psychology) , economics , portfolio , bond , asset allocation , investment (military) , term (time) , asset (computer security) , econometrics , cash , financial economics , ambiguity aversion , actuarial science , expected utility hypothesis , microeconomics , finance , quantum mechanics , politics , political science , computer science , law , linguistics , physics , ambiguity , computer security , philosophy
This paper studies the long‐term asset allocation problem of an investor with different risk aversion attitudes to the short and the long term. We characterize investor's preferences with a utility function exhibiting a regime shift in risk aversion at some point of the multiperiod investment horizon that is estimated using threshold nonlinearity methods. Our empirical results for a portfolio of cash, bonds and stocks suggest that long‐term risk aversion is higher than short‐term risk aversion and increases with the investment horizon. The exposure of the investment portfolio from stocks to bonds and cash increases with the degree of risk aversion.