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The investment horizon problem: A resolution

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Author Info

  • Aase, Knut K.

    ()
    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

In the canonical model of investments, the optimal fractions in the risky assets do not depend on the time horizon. This is against empirical evidence, and against the typical recommendations of portfolio managers. We demonstrate that if the intertemporal coefficient of relative risk aversion is allowed to depend on time, or the age of the investor, the investment horizon problem can be resolved. Accordingly, the only standard assumption in applied economics/finance that we relax in order to obtain our conclusion, is the state and time separability of the intertemporal felicity index in the investor’s utility function. We include life and pension insurance, and we also demonstrate that preferences aggregate.

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Bibliographic Info

Paper provided by Department of Business and Management Science, Norwegian School of Economics in its series Discussion Papers with number 2009/7.

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Length: 30 pages
Date of creation: 15 Sep 2009
Date of revision:
Handle: RePEc:hhs:nhhfms:2009_007

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Fax: +47 55 95 96 50
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Web page: http://www.nhh.no/en/research-faculty/department-of-business-and-management-science.aspx
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Related research

Keywords: The investment horizon problem; complete markets; life and pension insurance; dynamic programming; Kuhn-Tucker; directional derivatives; time consistency; aggregation;

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Cited by:
  1. Steffensen, Mogens, 2011. "Optimal consumption and investment under time-varying relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 659-667, May.

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