Arbeitspapier
Prospect theory and asset allocation
We study the asset allocation of an investor with prospect theory (PT) preferences. First, we solve analytically the two-asset problem of the PT investor for one risk-free and one risky asset and find that loss aversion and the reference return affect differently less ambitious investors and more ambitious investors. Second, we empirically investigate the performance of a PT portfolio when diversifying among a stock market index, a government bond and gold, in Europe and the US. We focus on investors with PT preferences under different scenarios regarding the reference return and the degree of loss aversion and compare their portfolio performance with the performance of investors under CVaR, risk neutral, linear loss averse and in particular mean-variance (MV) preferences. We find that, in the US, PT portfolios significantly outperform (in terms of returns) mean-variance portfolios in the majority of cases. Also with respect to riskadjusted performance, PT investment outperforms MV investment in the US. Similar results, however, can not be observed in Europe. Finally, we analyze asymmetric effects along economic uncertainty and observe that PT investment leads to higher returns than MV investment in times of larger economic uncertainty, especially in the US.
- Sprache
-
Englisch
- Erschienen in
-
Series: IHS Working Paper ; No. 42
- Klassifikation
-
Wirtschaft
Criteria for Decision-Making under Risk and Uncertainty
Portfolio Choice; Investment Decisions
International Financial Markets
- Thema
-
prospect theory
loss aversion
portfolio allocation
mean-variance portfolios
investment strategy
- Ereignis
-
Geistige Schöpfung
- (wer)
-
Fortin, Ines
Hlouskova, Jaroslava
- Ereignis
-
Veröffentlichung
- (wer)
-
Institut für Höhere Studien - Institute for Advanced Studies (IHS)
- (wo)
-
Vienna
- (wann)
-
2022
- Handle
- Letzte Aktualisierung
-
10.03.2025, 11:41 MEZ
Datenpartner
ZBW - Deutsche Zentralbibliothek für Wirtschaftswissenschaften - Leibniz-Informationszentrum Wirtschaft. Bei Fragen zum Objekt wenden Sie sich bitte an den Datenpartner.
Objekttyp
- Arbeitspapier
Beteiligte
- Fortin, Ines
- Hlouskova, Jaroslava
- Institut für Höhere Studien - Institute for Advanced Studies (IHS)
Entstanden
- 2022
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