Exponential risk measure with application to UK asset allocation
In the paper the exponential risk measure of Damant and Satchell is used to formulate an investor's utility function and the properties of this function are investigated. The utility function is calibrated for a typical UK investor who would hold different proportions of equity. It is found that, for plausible parameter values, a typical UK investor will hold more equity under the assumption of non-normality of return if his utility function has the above formulation and not the standard mean-variance utility function. Furthermore, our utility function is consistent with positive skewness affection and kurtosis aversion. Some aggregate estimates of risk parameters are calculated for the typical UK investor. These do not seem well determined, raising issues of the roles of aggregation and wealth in this model.
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Volume (Year): 7 (2000)
Issue (Month): 2 ()
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References listed on IDEAS
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- Hansen, Lars Peter & Singleton, Kenneth J, 1982. "Generalized Instrumental Variables Estimation of Nonlinear Rational Expectations Models," Econometrica, Econometric Society, vol. 50(5), pages 1269-86, September.
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- Robert R. Grauer & Nils H. Hakansson, 1995. "Gains From Diversifying Into Real Estate: Three Decades of Portfolio Returns Based on the Dynamic Investment Model," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 23(2), pages 117-159.
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