Journal of Banking & Finance Vol. 37 No. 12 2013
Limiting losses may be injurious to your wealth
Abstract
Theory tells us that if return distributions are independent over time, an expected utility maximizing logarithmic-utility investor will almost surely accumulate the most long-run wealth. This paper examines the robustness of the result. Specifically, it examines the expected and unexpected long-run and short-run consequences of imposing Value at Risk and other loss constraints on power-utility investors with a numerical example and empirically in an asset-allocation setting covering the 1934–2008 period. In addition, it examines the expected and unexpected long-run consequences of imposing Conditional Value at Risk constraints on power-utility and prospect-theory (kinked linear-utility) investors.
- DOI
- 10.1016/j.jbankfin.2013.07.047
- Volume
- 37
- Issue
- 12
- Pages
- 5088-5100
- Language
- en
- Sources
- crossref openalex bibtex:phds-export.bib