Multiperiod Asset Allocation Considering Dynamic Loss Aversion Behavior of Investors

Jia Wang, Mengchu Zhou, Xiwang Guo, Liang Qi

Research output: Contribution to journalArticlepeer-review

2 Scopus citations

Abstract

In order to study the effect of loss aversion behavior on multiperiod investment decisions, we first introduce some psychological characteristics of dynamic loss aversion and then construct a multiperiod portfolio model by considering a conditional value-at-risk (CVaR) constraint. We then design a variable neighborhood search-based hybrid genetic algorithm to solve the model. We finally study the optimal asset allocation and investment performance of the proposed multiperiod model. Some important metrics, such as the initial loss aversion coefficient and reference point, are used to test the robustness of the model. The result shows that investors with loss aversion tend to centralize most of their wealth and have a better performance than rational investors. The effects of CVaR on investment performance are given. When a market is falling, investors with a higher degree of risk aversion can avoid a large loss and can obtain higher gains.

Original languageEnglish (US)
Article number8588367
Pages (from-to)73-81
Number of pages9
JournalIEEE Transactions on Computational Social Systems
Volume6
Issue number1
DOIs
StatePublished - Feb 2019

All Science Journal Classification (ASJC) codes

  • Modeling and Simulation
  • Social Sciences (miscellaneous)
  • Human-Computer Interaction

Keywords

  • Conditional value-at-risk (CVaR)
  • dynamic loss aversion
  • genetic algorithm (GA)
  • multiperiod portfolio
  • prospect theory (PT)

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