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Investment horizon and the attractiveness of investment strategies: A behavioral approach

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  • Dierkes, Maik
  • Erner, Carsten
  • Zeisberger, Stefan

Abstract

We analyze the attractiveness of investment strategies over a variety of investment horizons from the viewpoint of an investor with preferences described by Cumulative Prospect Theory (CPT), currently the most prominent descriptive theory for decision making under uncertainty. A bootstrap technique is applied using historical return data of 1926-2008. To allow for variety in investors' preferences, we conduct several sensitivity analyses and further provide robustness checks for the results. In addition, we analyze the attractiveness of the investment strategies based on a set of experimentally elicited preference parameters. Our study reveals that strategy attractiveness substantially depends on the investment horizon. While for almost every preference parameter combination a bond strategy is preferred for the short run, stocks show an outperformance for longer horizons. Portfolio insurance turns out to be attractive for almost every investment horizon. Interestingly, we find probability weighting to be a driving factor for insurance strategies' attractiveness.

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  • Dierkes, Maik & Erner, Carsten & Zeisberger, Stefan, 2010. "Investment horizon and the attractiveness of investment strategies: A behavioral approach," Journal of Banking & Finance, Elsevier, vol. 34(5), pages 1032-1046, May.
  • Handle: RePEc:eee:jbfina:v:34:y:2010:i:5:p:1032-1046
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    3. Dichtl, Hubert & Drobetz, Wolfgang, 2011. "Portfolio insurance and prospect theory investors: Popularity and optimal design of capital protected financial products," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1683-1697, July.
    4. Hedmilton Mourão Cardoso & Claudio Henrique da Silveira Barbedo & José Valentim Machado Vicente, 2012. "Dynamic strategies to optimize asset allocation: empirical evidence in the Brazilian market," Brazilian Business Review, Fucape Business School, vol. 9(2), pages 109-133, April.
    5. Erdemlioglu, Deniz & Joliet, Robert, 2019. "Long-term asset allocation, risk tolerance and market sentiment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 62(C), pages 1-19.
    6. Bertrand, Philippe & Prigent, Jean-luc, 2011. "Omega performance measure and portfolio insurance," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1811-1823, July.
    7. Tawil, Dima, 2018. "Risk-adjusted performance of portfolio insurance and investors’ preferences," Finance Research Letters, Elsevier, vol. 24(C), pages 10-18.
    8. Chen, An & Hentschel, Felix & Klein, Jakob K., 2015. "A utility- and CPT-based comparison of life insurance contracts with guarantees," Journal of Banking & Finance, Elsevier, vol. 61(C), pages 327-339.
    9. Myroslava Kushnir, 2015. "Investment strategy to avoid losses on the ukrainian stock market," Ukrainian Journal Ekonomist, Yuriy Kovalenko, issue 11, pages 19-22, November.
    10. Zieling, Daniel & Mahayni, Antje & Balder, Sven, 2014. "Performance evaluation of optimized portfolio insurance strategies," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 212-225.
    11. Hubert Dichtl & Wolfgang Drobetz & Martin Wambach, 2017. "A bootstrap-based comparison of portfolio insurance strategies," The European Journal of Finance, Taylor & Francis Journals, vol. 23(1), pages 31-59, January.
    12. Rosella Castellano & Roy Cerqueti, 2013. "Roots and effects of financial misperception in a stochastic dominance framework," Quality & Quantity: International Journal of Methodology, Springer, vol. 47(6), pages 3371-3389, October.
    13. Charles-Cadogan, G., 2021. "Market Instability, Investor Sentiment, And Probability Judgment Error in Index Option Prices," CRETA Online Discussion Paper Series 71, Centre for Research in Economic Theory and its Applications CRETA.

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