Journal of Financial Economics Vol. 76 No. 3 2005

Why stocks may disappoint

Andrew Ang^1,2,3; Geert Bekaert³; Jun Liu⁴

¹ University of Southern California · ² California Southern University · ³ Columbia University · ⁴ University of California, Los Angeles

Abstract

We provide a formal treatment of both static and dynamic portfolio choice using the Disappointment Aversion preferences of Gul (1991. Econometrica 59(3), 667–686), which imply asymmetric aversion to gains versus losses. Our dynamic formulation nests the standard CRRA asset allocation problem as a special case. Using realistic data generating processes, we find reasonable equity portfolio allocations for disappointment averse investors with utility functions exhibiting low curvature. Moderate variation in parameters can robustly generate substantial cross-sectional variation in portfolio holdings, including optimal non-participation in the stock market.

DOI

10.1016/j.jfineco.2004.03.009

Volume

76

Issue

3

Pages

471-508

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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