Advanced Search
MyIDEAS: Login to save this paper or follow this series

Asset class allocation and downside risk: does the investment horizon matter?

Contents:

Author Info

  • Brouwer, Frank

    (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)

  • Ruiter, Hans de
Registered author(s):

    Abstract

    The main objective of this paper is to analyze within the Mean-Downside Risk (MDR)-framework the relevance of the investment horizon for deriving optimal US asset class allocations. The choice of this risk framework is motivated by its close connection towards the way investors perceive risk and the fact that it is much more general than the often used Mean-Variance (MV) analysis. Unlike the MV-studies of Levy and Gunthorpe (1993) and Thorley (1995) we do not assume returns to follow a random walk. Instead we use a vector autoregressive specification to model the historical time series such that short-term first-order auto- and crosscovariances are preserved. Different from the MV-paper of Lee (1990) is that we explicitly model the short-term first-order auto- and crosscovariances and that we consider more than two asset classes. Our simulation tests show the weight assigned to stocks to be positively related to the length of the investment horizon. This contradicts the MV-findings of Lee (1990), Levy and Gunthorpe (1993) and Thorley (1995). The relation appears to be most apparent for investors with a low downside-risk aversion. However, even investors whose downside-risk, aversion parameter goes to infinity end up with 11% in stocks for long horizons. This conclusion is based on various assumptions. In order to get insight in the robustness of our results we carried out an extensive sensitivity analysis with respect to the inputs. Only in the situation where we assume a form of investor behavior that is beyond the one that is

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL: ftp://zappa.ubvu.vu.nl/19970012.pdf
    Our checks indicate that this address may not be valid because: 500 Failed to connect to FTP server zappa.ubvu.vu.nl: Net::FTP: Bad hostname 'zappa.ubvu.vu.nl'. If this is indeed the case, please notify (R. Dam)
    Download Restriction: no

    Bibliographic Info

    Paper provided by VU University Amsterdam, Faculty of Economics, Business Administration and Econometrics in its series Serie Research Memoranda with number 0012.

    as in new window
    Length:
    Date of creation: 1997
    Date of revision:
    Handle: RePEc:dgr:vuarem:1997-12

    Contact details of provider:
    Web page: http://www.feweb.vu.nl

    Related research

    Keywords:

    Find related papers by JEL classification:

    This paper has been announced in the following NEP Reports:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Andrew W. Lo & A. Craig MacKinlay, 1987. "Stock Market Prices Do Not Follow Random Walks: Evidence From a Simple Specification Test," NBER Working Papers 2168, National Bureau of Economic Research, Inc.
    2. Campbell, John Y., 1987. "Stock returns and the term structure," Journal of Financial Economics, Elsevier, vol. 18(2), pages 373-399, June.
    3. Mao, James C T, 1970. "Survey of Capital Budgeting: Theory and Practice," Journal of Finance, American Finance Association, vol. 25(2), pages 349-60, May.
    4. Fama, Eugene F & French, Kenneth R, 1988. "Permanent and Temporary Components of Stock Prices," Journal of Political Economy, University of Chicago Press, vol. 96(2), pages 246-73, April.
    5. Keim, Donald B. & Stambaugh, Robert F., 1986. "Predicting returns in the stock and bond markets," Journal of Financial Economics, Elsevier, vol. 17(2), pages 357-390, December.
    6. R. Mehra & E. Prescott, 2010. "The equity premium: a puzzle," Levine's Working Paper Archive 1401, David K. Levine.
    7. Kroll, Yoram & Levy, Haim & Markowitz, Harry M, 1984. " Mean-Variance versus Direct Utility Maximization," Journal of Finance, American Finance Association, vol. 39(1), pages 47-61, March.
    8. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
    9. Friend, Irwin & Blume, Marshall E, 1975. "The Demand for Risky Assets," American Economic Review, American Economic Association, vol. 65(5), pages 900-922, December.
    10. Levy, H & Markowtiz, H M, 1979. "Approximating Expected Utility by a Function of Mean and Variance," American Economic Review, American Economic Association, vol. 69(3), pages 308-17, June.
    11. Fishburn, Peter C, 1977. "Mean-Risk Analysis with Risk Associated with Below-Target Returns," American Economic Review, American Economic Association, vol. 67(2), pages 116-26, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:dgr:vuarem:1997-12. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (R. Dam).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.