Portfolio Performance Evaluation with Loss Aversion
Quantitative Finance, Forthcoming
21 Pages Posted: 5 Jan 2010 Last revised: 6 Sep 2011
Date Written: January 4, 2010
Abstract
In this paper we consider a loss averse investor equipped with a specific, but still quite general, utility function motivated by behavioral finance. We show that under some concrete assumptions about the form of this utility one can derive closed-form solutions for the investor's portfolio performance measure. We investigate the effects of loss aversion and demonstrate its important role in performance measurement. The framework presented in this paper also provides a sound theoretical foundation for all known performance measures based on partial moments of distribution.
Keywords: utility theory, behavioral finance, portfolio performance evaluation, performance measure, reward-to-risk ratio, loss aversion
JEL Classification: D81, G11
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
By Andrew Ang, Geert Bekaert, ...
-
By Andrew Ang, Geert Bekaert, ...
-
Individual Preferences, Monetary Gambles, and Stock Market Participation: A Case for Narrow Framing
By Nicholas Barberis, Ming Huang, ...
-
Optimal Portfolio Choice Under Loss Aversion
By Arjan B. Berkelaar, Roy Kouwenberg, ...
-
The Implications of First-Order Risk Aversion for Asset Market Risk Premiums
By Geert Bekaert, Robert J. Hodrick, ...
-
Portfolio Choice and Trading Volume with Loss Averse Investors
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
What Drives the Disposition Effect? An Analysis of a Long-Standing Preference-Based Explanation
By Nicholas Barberis and Wei Xiong
-
The Independence Axiom and Asset Returns
By Larry G. Epstein and Stanley E. Zin
-
Individual Preferences, Monetary Gambles and the Equity Premium
By Nicholas Barberis, Ming Huang, ...