Asset allocation with disappointment aversion

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Abstract

This paper investigates disappointment aversion (DA) in financial markets within a typical asset allocation framework. Drawing upon the seminal study of Ang et. al. (2005), we incorporate disappointment aversion (that is, aversion to outcomes that are worse than prior expectations) within a simple theoretical portfolio-choice model. Based on the results of this model, we then empirically address the portfolio allocation problem of an investor who chooses between a risky and a risk-free asset using international data from 19 countries [see Xie et al. (2013)]. Our findings strongly support the view that disappointment aversion leads investors to reduce their exposure to the stock market (i.e., disappointment aversion significantly depresses the weights to equities in all cases considered). Overall, it appears that disappointment aversion plays an important role in explaining the equity premium puzzle around the world.

Original languageEnglish
Title of host publicationVulnerability, Uncertainty, and Risk
Subtitle of host publicationQuantification, Mitigation, and Management - Proceedings of the Second International Conference on Vulnerability and Risk Analysis and Management (ICVRAM) and the Sixth International Symposium on Uncertainty Modeling and Analysis (ISUMA)
EditorsMichael Beer, Siu-Kui Au, Jim W. Hall
Place of PublicationReston VA USA
PublisherAmerican Society of Civil Engineers
Pages1180-1189
Number of pages10
ISBN (Electronic)9780784413609
DOIs
Publication statusPublished - 2014
Externally publishedYes
EventInternational Conference on Vulnerability and Risk Analysis and Management and the International Symposium on Uncertainty Modeling and Analysis 2014 - University of Liverpool, Liverpool, United Kingdom
Duration: 13 Jul 201416 Jul 2014
http://www.icvram2014.org/

Conference

ConferenceInternational Conference on Vulnerability and Risk Analysis and Management and the International Symposium on Uncertainty Modeling and Analysis 2014
Abbreviated titleASCE-ICVRAM-ISUMA 2014
CountryUnited Kingdom
CityLiverpool
Period13/07/1416/07/14
Other2nd International Conference on Vulnerability and Risk Analysis and Management and the 6th International Symposium on Uncertainty Modeling and Analysis
Internet address

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