Horizon Length and Portfolio Risk
In this paper, we compare the attitude towards current risk of two expected-utility-maximizing investors who are identical except that the first investor will live longer than the second one. It is often suggested that the young investor should take more risks than the old investor. We consider as a benchmark the case of complete markets with a zero risk-free rate. We show that a necessary and sufficient condition to assure that younger is riskier is that the Arrow-Pratt index of absolute tolerance (T) be convex. If we allow for a positive risk-free rate, the necessary and sufficient condition is T convex, plus T(0) = 0. It extends the well-known result that rational investors can behave myopically if and only if the utility function exhibits constant relative risk aversion. Copyright 2002 by Kluwer Academic Publishers
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.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 24 (2002)
Issue (Month): 3 (May)
Pages: 195-212
| Handle: | RePEc:kap:jrisku:v:24:y:2002:i:3:p:195-212 |
| Contact details of provider: | Web page: http://www.springerlink.com/link.asp?id=100299
|
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.:
- 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.
- Kimball, Miles S, 1990.
"Precautionary Saving in the Small and in the Large,"
Econometrica,
Econometric Society, vol. 58(1), pages 53-73, January.
- Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1994.
"Income Risk, Borrowing Constraints and Portfolio Choice,"
CEPR Discussion Papers
888, C.E.P.R. Discussion Papers.
- Guiso, Luigi & Jappelli, Tullio & Terlizzese, Daniele, 1996. "Income Risk, Borrowing Constraints, and Portfolio Choice," American Economic Review, American Economic Association, vol. 86(1), pages 158-72, March.
- He Hua & Huang Chi-fu, 1994. "Consumption-Portfolio Policies: An Inverse Optimal Problem," Journal of Economic Theory, Elsevier, vol. 62(2), pages 257-293, April.
- Cox, John C. & Leland, Hayne E., 2000. "On dynamic investment strategies," Journal of Economic Dynamics and Control, Elsevier, vol. 24(11-12), pages 1859-1880, October.
- Zvi Bodie & Robert C. Merton & William F. Samuelson, 1992.
"Labor Supply Flexibility and Portfolio Choice in a Life-Cycle Model,"
NBER Working Papers
3954, National Bureau of Economic Research, Inc.
- Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
- Gollier, Christian & Lindsey, John & Zeckhauser, Richard J., 1997.
"Investment Flexibility and the Acceptance of Risk,"
Journal of Economic Theory,
Elsevier, vol. 76(2), pages 219-241, October.
- Gollier, C. & Lindsey, J. & Zeckhauser, R., 1996. "Investment Flexibility and the Acceptance of Risk," Papers 96.421, Toulouse - GREMAQ.
- Miles S. Kimball, 1991.
"Standard Risk Aversion,"
NBER Technical Working Papers
0099, National Bureau of Economic Research, Inc.
- Kimball, Miles S, 1993. "Standard Risk Aversion," Econometrica, Econometric Society, vol. 61(3), pages 589-611, May.
- Kessler, Denis & Wolff, Edward N, 1991. "A Comparative Analysis of Household Wealth Patterns in France and the United States," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 37(3), pages 249-66, September.
- Dybvig, Philip H & Lippman, Steven A, 1983. "An Alternative Characterization of Decreasing Absolute Risk Aversion," Econometrica, Econometric Society, vol. 51(1), pages 223-24, January.
- Pratt, John W & Zeckhauser, Richard J, 1987. "Proper Risk Aversion," Econometrica, Econometric Society, vol. 55(1), pages 143-54, January.
This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.
When requesting a correction, please mention this item's handle: RePEc:kap:jrisku:v:24:y:2002:i:3:p:195-212. 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: (Guenther Eichhorn)
or (Christopher F. Baum)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.