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Portfolio performance evaluation with loss aversion

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  • Valeri Zakamouline

Abstract

In this paper we consider a loss-averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that, under certain concrete assumptions concerning the form of this utility, one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of the distribution.

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  • Valeri Zakamouline, 2014. "Portfolio performance evaluation with loss aversion," Quantitative Finance, Taylor & Francis Journals, vol. 14(4), pages 699-710, April.
    • Handle: RePEc:taf:quantf:v:14:y:2014:i:4:p:699-710
    DOI: 10.1080/14697688.2011.620978
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    17. Curatola, Giuliano, 2016. "Optimal consumption and portfolio choice with loss aversion," SAFE Working Paper Series 130, Leibniz Institute for Financial Research SAFE.
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