Discussion Papers, Department of Finance and Management Science, Norwegian School of Economics (NHH)
No 2009/7:
The investment horizon problem: A resolution
Knut K. Aase ()
Abstract: In the canonical model of investments, the optimal
fractions in the risky assets do not depend on the time horizon. This is
against empirical evidence, and against the typical recommendations of
portfolio managers. We demonstrate that if the intertemporal coefficient of
relative risk aversion is allowed to depend on time, or the age of the
investor, the investment horizon problem can be resolved. Accordingly, the
only standard assumption in applied economics/finance that we relax in
order to obtain our conclusion, is the state and time separability of the
intertemporal felicity index in the investor’s utility function. We include
life and pension insurance, and we also demonstrate that preferences
aggregate.
Keywords: The investment horizon problem; complete markets; life and pension insurance; dynamic programming; Kuhn-Tucker; directional derivatives; time consistency; aggregation; (follow links to similar papers)
JEL-Codes: G10; G22; (follow links to similar papers)
30 pages, September 15, 2009
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