Young, Timid, and Risk Takers

21 Pages Posted: 18 Feb 2021 Last revised: 13 Oct 2021

See all articles by Paolo Guasoni

Paolo Guasoni

Boston University - Department of Mathematics and Statistics; Dublin City University - School of Mathematical Sciences; University of Bologna - Department of Statistics

Miklos Rasonyi

Hungarian Academy of Sciences (HAS) - Alfréd Rényi Institute of Mathematics

Lóránt Nagy

Central European University (CEU)

Date Written: December 21, 2020

Abstract

Time-varying asset returns lead highly risk-averse investors to choose market-timing exposures that increase in their horizon, in agreement with the common advice to reduce risk with age, but in contrast to theoretical work that prescribes constant portfolio weights. In a market where an investor with constant absolute risk aversion and finite horizon trades an asset with temporary fluctuations, we find asymptotically optimal investment strategies that are independent of the asset's average return and decline over time with a power of the remaining horizon, with the exponent determined by the curvature of mean reversion. For long-term safe assets, which have a zero average return, the investor's certainty equivalent declines over time at a lower rate, implying that the a nonzero average return is negligible for asymptotically optimal strategies but critical to their performance.

Keywords: mean-reversion, exponential utility, portfolio choice, long-term safe assets

JEL Classification: G11, G12

Suggested Citation

Guasoni, Paolo and Guasoni, Paolo and Rasonyi, Miklos and Nagy, Lóránt, Young, Timid, and Risk Takers (December 21, 2020). Michael J. Brennan Irish Finance Working Paper Series Research Paper No. 21-11, Available at SSRN: https://ssrn.com/abstract=3763151 or http://dx.doi.org/10.2139/ssrn.3763151

Paolo Guasoni (Contact Author)

Boston University - Department of Mathematics and Statistics ( email )

Boston, MA 02215
United States

Dublin City University - School of Mathematical Sciences ( email )

Dublin
Ireland

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

University of Bologna - Department of Statistics ( email )

Bologna, 40126
Italy

Miklos Rasonyi

Hungarian Academy of Sciences (HAS) - Alfréd Rényi Institute of Mathematics

Realtanoda u 13-15
Budapest
Hungary

Lóránt Nagy

Central European University (CEU) ( email )

Nador utca 9
Budapest, H-1051
Hungary

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