Increasing Risk Aversion, Habits, and Life-Cycle Investing
52 Pages
Posted: 4 Apr 2015
Last revised: 12 Apr 2016
Rice University - Jones Graduate School of Business and Department of Economics
Rice University, Jesse H. Jones Graduate School of Business, Students
Rice University, Jesse H. Jones Graduate School of Business, Students
Date Written: April 11, 2016
Abstract
We derive the optimal portfolio for an investor with increasing relative risk aversion in a complete continuous-time securities market. The IRRA assumption helps to mitigate the criticism of constant relative risk aversion that it implies an unreasonably large aversion to large gambles, given reasonable aversion to small gambles. The model provides theoretical support for the common recommendation of financial advisors that older investors should reduce their allocations to risky assets and is consistent with empirical findings on the relations between age, wealth, and portfolios. Preferences for habits and IRRA preferences have some similar implications and are complementary assumptions.
Keywords: Risk Aversion, Portfolio Choice, Habit
Suggested Citation:
Suggested Citation
Back, Kerry and Liu, Ruomeng and Teguia, Alberto, Increasing Risk Aversion, Habits, and Life-Cycle Investing (April 11, 2016). Available at SSRN: https://ssrn.com/abstract=2589390 or http://dx.doi.org/10.2139/ssrn.2589390
