Financial Risk Aversion and Household Asset Diversification

Asset Selection and Under-Diversification with Financial Constraints and Income: Implications for Household Portfolio Studies

Asset Selection and Under-Diversification with Financial Constraints and Income: Implications for Household Portfolio Studies

Empirical studies of household portfolios have shown that young and relatively poor households hold under-diversified portfolios that are concentrated in a small number of assets, a fact often attributed to various behavioral biases. We present a model that offers a potential rational alternative: we show that relatively poor investors; i.e., investors with little financial wealth, who receive ...

Temporal Risk Aversion and Asset Prices

Agents with standard, time-separable preferences do not care about the temporal distribution of risk. This is a strong assumption. For example, it seems plausible that a consumer may …nd persistent shocks to consumption less desirable than uncorrelated ‡uctuations. Such a consumer is said to exhibit temporal risk aversion. This paper examines the implications of temporal risk aversion for asset...

Dynamic Asset Allocation and Downside-Risk Aversion

This paper considers dynamic asset allocation in a mean versus downside-risk framework. We derive closed-form solutions for the optimal portfolio weights when returns are lognormally distributed. Moreover, we study the impact of skewed and fat-tailed return distributions. We nd that the optimal fraction invested in stocks is V-shaped: at low and high levels of wealth the investor increases the ...

Cognitive Biases, Ambiguity Aversion and Asset Pricing in Financial Markets∗

The behavior of agents in financial markets often displays biases or errors; for example, agents frequently do not compute probabilities correctly. However, we argue that these biases/errors are not always reflected in prices. In particular, we hypothesize that agents who make errors in computing probabilities lose confidence in their probability estimates when they face market prices that are ...