Long-Term Dynamic Asset Allocation Under Asymmetric Risk Preferences

European Journal of Operational Research, Volume 312, Issue 2, pp. 765-782, 16 January 2024, DOI 10.1016/j.ejor.2023.07.038

55 Pages Posted: 22 Oct 2018 Last revised: 25 Oct 2023

See all articles by Vasileios Kontosakos

Vasileios Kontosakos

Group Risk - Allianz SE

Soosung Hwang

Sungkyunkwan University - Department of Economics

Vasileios Kallinterakis

University of Liverpool - Management School (ULMS)

Athanasios A. Pantelous

Monash University - Department of Econometrics & Business Statistics

Date Written: July 28, 2023

Abstract

In this paper, we examine the impact of return predictability and parameter uncertainty on long-term portfolio allocations when investors treat their expected gains and losses differently. Allowing for different return generating systems, we examine the way portfolio allocation to the risky asset evolves over the course of the investment horizon in the presence of asymmetric responses to risk (e.g., gains vs losses). We find persisting horizon effects, with stocks appearing progressively more attractive at longer horizons as opposed to shorter ones. The role of parameter uncertainty appears to be prominent in the portfolio choice problem. Accounting for this results in both significantly lowering the exposure to the risky asset and dampening the horizon effects driven by return predictability. An equally important aspect of this study relates to detecting a level of disappointment aversion below which it is optimal for investors to hold zero units of a risky asset. In this regard, our decision making framework and analysis have implications for the nonparticipation puzzle in stock markets.

Keywords: Decision analysis, Asset Allocation, Asymmetric Risk Preferences, Parameter uncertainty, Simulation Study

JEL Classification: G40, C61, G11

Suggested Citation

Kontosakos, Vasileios and Hwang, Soosung and Kallinterakis, Vasileios and Pantelous, Athanasios A., Long-Term Dynamic Asset Allocation Under Asymmetric Risk Preferences (July 28, 2023). European Journal of Operational Research, Volume 312, Issue 2, pp. 765-782, 16 January 2024, DOI 10.1016/j.ejor.2023.07.038, Available at SSRN: https://ssrn.com/abstract=3270686 or http://dx.doi.org/10.2139/ssrn.3270686

Vasileios Kontosakos

Group Risk - Allianz SE ( email )

Königinstrasse 28
Munich, 80802
Germany

Soosung Hwang

Sungkyunkwan University - Department of Economics ( email )

25-2, Sungkyunkwan-ro
Jongno-gu
Seoul, 03063
+82 (0)2 760 0489 (Phone)
+82 (0)2 744 5717 (Fax)

HOME PAGE: http://sites.google.com/view/soosunghwang

Vasileios Kallinterakis

University of Liverpool - Management School (ULMS) ( email )

Chatham Street
Liverpool, L69 7ZH
United Kingdom

Athanasios A. Pantelous (Contact Author)

Monash University - Department of Econometrics & Business Statistics ( email )

Wellington Road
Clayton, Victoria 3168
Australia

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