ON THE SHAPE OF RISK AVERSION AND ASSET ALLOCATION

2014 ◽  
Vol 17 (08) ◽  
pp. 1450054
Author(s):  
PIERRE SIX
Keyword(s):  
Relative Risk ◽  
Numerical Analysis ◽  
Risk Aversion ◽  
Asset Allocation ◽  
Empirical Studies ◽  
Relevant Literature ◽  
Relative Risk Aversion ◽  
Measures Of Risk ◽  
Constant Relative Risk Aversion

This paper demonstrates the simple incorporation of any shape of risk aversion into an asset allocation framework. Indeed, the relevant literature about risk aversion shows mixed evidence regarding the shape of this important but subjective variable. Our setting builds on, and can be compared with, the well-known constant relative risk aversion (CRRA) framework and mostly preserves the tractability of the affine-CRRA framework. Our numerical analysis exhibits some link between measures of risk aversions and empirical studies of asset allocation.

A Simplified Measure of Investor Risk Aversion

2020 ◽  
pp. 026010792092451
Author(s):  
John Grable ◽  
Eun Jin Kwak ◽  
Martha Fulk ◽  
Aditi Routh
Keyword(s):  
United States ◽  
Relative Risk ◽  
Risk Aversion ◽  
Risk Taking ◽  
Measurement Techniques ◽  
Revealed Preference ◽  
The United States ◽  
Relative Risk Aversion ◽  
Measures Of Risk ◽  
Constant Relative Risk Aversion

This article introduces a simplified measure of investor risk aversion. The singleitem question combines elements from revealed preference and propensity measurement techniques in a way that matches traditional constant relative risk-aversion estimation procedures. Based on survey data from 500 investors living in the United States, scores from the proposed measure were found to correlate with other measures of risk aversion, as well as with indicators of risk-taking. A validity test showed that answers to the proposed measure were statistically associated with equity and cash ownership holdings in respondent portfolios. The simplicity and intuitive nature of the proposed measure and the alignment of question response categories to estimates of constant relative risk aversion make this a potentially valuable addition to the toolkit of researchers, financial educators, investors and those who provide advice to investors. JEL: C83, D10, D11, D14, D19, D81

scholarly journals Prospect theory, constant relative risk aversion, and the investment horizon

PLoS ONE ◽  
2021 ◽  
Vol 16 (4) ◽  
pp. e0248904
Author(s):  
Haim Levy ◽  
Moshe Levy
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Prospect Theory ◽  
Asset Allocation ◽  
Optimal Allocation ◽  
Strong Support ◽  
Investment Horizon ◽  
Relative Risk Aversion ◽  
Clear Cut ◽  
Constant Relative Risk Aversion

Prospect Theory (PT) and Constant-Relative-Risk-Aversion (CRRA) preferences have clear-cut and very different implications for the optimal asset allocation between a riskless asset and a risky stock as a function of the investment horizon. While CRRA implies that the optimal allocation is independent of the horizon, we show that PT implies a dramatic and discontinuous “jump” in the optimal allocation as the horizon increases. We experimentally test these predictions at the individual level. We find rather strong support for CRRA, but very little support for PT.

scholarly journals Solution to the Equity Premium Puzzle

2021 ◽  
Author(s):  
Atilla Aras
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Risk Behavior ◽  
Empirical Studies ◽  
Equity Premium ◽  
Subjective Time ◽  
Relative Risk Aversion ◽  
Equity Premium Puzzle ◽  
Time Discount ◽  
Premium Puzzle

This study provides a solution of the equity premium puzzle. Questioning the validity of the Arrow-Pratt measure of relative risk aversion for detecting the risk behavior of investors, a new tool in the form of the sufficiency factor of the model was developed to analyze the risk behavior of investors. The calculations of this newly tested model show that the value of the coefficient of relative risk aversion is 1.033526 by assuming the value of the subjective time discount factor as 0.99. Since these values are compatible with the existing empirical studies, they confirm the validity of the newly derived model that provides a solution to the equity premium puzzle.

scholarly journals Partnerships of Bidders with Constant Relative Risk Aversions

2020 ◽  
Vol 2020 ◽  
pp. 1-7
Author(s):  
Pingping Zhao ◽  
Kaili Xiang ◽  
Peimin Chen
Keyword(s):  
Relative Risk ◽  
Risk Aversion ◽  
Relative Risk Aversion ◽  
Unique Equilibrium ◽  
Risk Neutral ◽  
Bid Price ◽  
Risk Aversion Coefficient ◽  
Constant Relative Risk Aversion ◽  
The Difference

In this paper, we study a dynamic auction for allocating a single indivisible project while different participants have different bid values for the project. When the price rises continuously, the bidders can retreat the auction and obtain the compensation by the difference between the price at retreating time and the previous bid price. The final successful bidder achieves the project and pays compensations to others. We show that the auction of bidders with constant relative risk aversion (CRRA) has a unique equilibrium. While the relative risk aversion coefficient approaches to zero, the equilibrium with CRRA bidders would approach to the equilibrium with risk-neutral bidders.

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