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Differences Between Short‐ and Long‐Term Risk Aversion: An Optimal Asset Allocation Perspective

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  • Jesus Gonzalo
  • Jose Olmo

Abstract

This paper studies the long‐term asset allocation problem of an investor with different risk aversion attitudes to the short and the long term. We characterize investor's preferences with a utility function exhibiting a regime shift in risk aversion at some point of the multiperiod investment horizon that is estimated using threshold nonlinearity methods. Our empirical results for a portfolio of cash, bonds and stocks suggest that long‐term risk aversion is higher than short‐term risk aversion and increases with the investment horizon. The exposure of the investment portfolio from stocks to bonds and cash increases with the degree of risk aversion.

Suggested Citation

  • Jesus Gonzalo & Jose Olmo, 2019. "Differences Between Short‐ and Long‐Term Risk Aversion: An Optimal Asset Allocation Perspective," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 81(1), pages 42-61, February.
    • Handle: RePEc:bla:obuest:v:81:y:2019:i:1:p:42-61
    DOI: 10.1111/obes.12247
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