Portfolio choice when stock returns may disappoint: An empirical analysis based on L-moments

68 Pages Posted: 30 Jul 2018 Last revised: 24 May 2022

See all articles by Hasan Fallahgoul

Hasan Fallahgoul

Monash University ; Monash University

Loriano Mancini

USI Lugano - Institute of Finance; Swiss Finance Institute

Stoyan V. Stoyanov

Charles Schwab

Date Written: August 27, 2019

Abstract

We empirically examine the equity portfolio choice of investors with generalized disappointment aversion (GDA) preferences. Opposite to expected utility investors, GDA investors suffer large utility losses from suboptimal trading strategies such as equally weighted portfolios. These losses arise from the sensitivity to disappointing returns rather than from the threshold below which returns are perceived to be disappointing. Using a newly developed estimation method based on L-moments, we find that high order L-moments up to order ten, unlike conventional moments, have a substantial and economically sensible impact on portfolio choice.

Keywords: choice under uncertainty, optimal portfolios, generalized disappointment aversion, higher-order moments

JEL Classification: C5, G12

Suggested Citation

Fallahgoul, Hasan A and Fallahgoul, Hasan A and Mancini, Loriano and Stoyanov, Stoyan Veselinov, Portfolio choice when stock returns may disappoint: An empirical analysis based on L-moments (August 27, 2019). Swiss Finance Institute Research Paper No. 18-65, Proceedings of Paris December 2019 Finance Meeting EUROFIDAI - ESSEC, 31st Australasian Finance and Banking Conference 2018, Available at SSRN: https://ssrn.com/abstract=3221471 or http://dx.doi.org/10.2139/ssrn.3221471

Hasan A Fallahgoul (Contact Author)

Monash University ( email )

Clayton Campus
Victoria, 3800
Australia

HOME PAGE: http://www.hfallahgoul.com

Monash University ( email )

Clayton Campus
Victoria, 3800
Australia

HOME PAGE: http://www.hfallahgoul.com

Loriano Mancini

USI Lugano - Institute of Finance ( email )

Via Giuseppe Buffi 6
6904 Lugano, CH-6904
Switzerland
+41 (0)91 912 46 47 (Fax)

HOME PAGE: http://www.people.usi.ch/mancil/

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Stoyan Veselinov Stoyanov

Charles Schwab ( email )

101 Montgomery Street (120K-15)
San Francisco, CA 94104
United States

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