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Inter-Temporal Optimal Asset Allocation and Time-Varying Risk Aversion |
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PP: 2729-2737 |
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Author(s) |
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Honglin Yang,
Penglan Fang,
Hong Wan,
Yong Zha,
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Abstract |
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The inter-temporal optimal decision is related to investors risk preference. In this study, we analyze the optimal asset
allocation over investment horizon of invariable risk preference indicated by constant risk aversion. To capture dynamic property of
risk aversion, we relax the assumption of constant risk aversion and formulate a time-varying function in response to the impacts of time
and wealth. Our general decision model built on time-varying risk aversion allows us to further investigate the inter-temporal optimal
asset allocation. The numerical evidences from the model show that the optimal allocation of risky assets in portfolios is significantly
related to investors risk aversion and that the time diversification is not existed under the time-varying risk aversion. |
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