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Measuring efficiency and risk preferences in dynamic portfolio choice

Author

Listed:
  • Jacopo Magnani

    (EM Lyon)

  • Jean Paul Rabanal

    (Monash University)

  • Olga A. Rud

    (RMIT)

  • Yabin Wang

    (Hong Kong Monetary Authority)

Abstract

This paper uses non-parametric methods to study the efficiency (Dybvig, 1988) and risk-profile (Varian, 1988) of dynamic portfolio choices. We design an experiment which varies the number of states (complexity), and includes an equivalent static Arrow-Debreu problem. The results suggest that complexity reduces efficiency, as does lower cognitive ability. Efficiency is also lower in the static problem, and in the dynamic task it is mostly driven by a form of stop-loss strategy. Further, we find that a representative agent exhibits decreasing absolute risk aversion and constant relative risk aversion, despite significant individual heterogeneity.

Suggested Citation

  • Jacopo Magnani & Jean Paul Rabanal & Olga A. Rud & Yabin Wang, 2020. "Measuring efficiency and risk preferences in dynamic portfolio choice," Working Papers 165, Peruvian Economic Association.
    • Handle: RePEc:apc:wpaper:165
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