Behavior Finance and Estimation Risk in Stochastic Portfolio Optimization
AbstractThe objective of this paper is twofold. The first is to incorporate mental accounting, loss-aversion, asymmetric risk-taking behavior, and probability weighting in a multi-period portfolio optimization for individual investors. While these behavioral biases have previously been identified in the literature, their overall impact during the determination of optimal asset allocation in a multi-period analysis is still missing. The second objective is to account for the estimation risk in the analysis. Considering 26 daily index stock data over the period from 1995 to 2007, we empirically evaluate our model (BRATE – Behavior Resample Adjusted Technique) against the traditional Markowitz model.
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Bibliographic InfoPaper provided by Central Bank of Brazil, Research Department in its series Working Papers Series with number 184.
Date of creation: Apr 2009
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Web page: http://www.bcb.gov.br/?english
Other versions of this item:
- Jose Luiz Barros Fernandes & Juan Ignacio Pena & Benjamin Miranda Tabak, 2010. "Behaviour finance and estimation risk in stochastic portfolio optimization," Applied Financial Economics, Taylor & Francis Journals, vol. 20(9), pages 719-738.
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- NEP-CBE-2009-09-05 (Cognitive & Behavioural Economics)
- NEP-CFN-2009-09-05 (Corporate Finance)
- NEP-UPT-2009-09-05 (Utility Models & Prospect Theory)
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