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Haim Levy - One of the best experts on this subject based on the ideXlab platform.
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prospect theory constant relative risk aversion and the Investment Horizon
PLOS ONE, 2021Co-Authors: Haim Levy, Moshe LevyAbstract:Prospect Theory (PT) and Constant-Relative-Risk-Aversion (CRRA) preferences have clear-cut and very different implications for the optimal asset allocation between a riskless asset and a risky stock as a function of the Investment Horizon. While CRRA implies that the optimal allocation is independent of the Horizon, we show that PT implies a dramatic and discontinuous "jump" in the optimal allocation as the Horizon increases. We experimentally test these predictions at the individual level. We find rather strong support for CRRA, but very little support for PT.
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stocks versus bonds and the Investment Horizon
Social Science Research Network, 2019Co-Authors: Haim Levy, Moshe LevyAbstract:Many investors and institutions have a long-run Investment perspective, hence the question of stocks versus bonds in the long-run is of central importance. Despite the great deal of research attention devoted to this issue, views remain conflicting. Indeed, neither stocks nor bonds dominate when compared in isolation, but we show that incorporating into the analysis the long-term riskless asset (TIPS) offers a clear-cut resolution. For any Horizon greater than 3 years, stocks dominate bonds by First-degree Stochastic Dominance with a Riskless asset (FSDR). This implies that for any combination of bonds with TIPS, there exists a combination of stocks with TIPS that dominates it for any investor with non-decreasing preferences. Thus, the dominance of stocks over bonds for the long-run holds not only for expected utility maximizers, but also for Prospect Theory investors and investors with various aspiration levels as well.
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prospect theory constant relevant risk aversion and the Investment Horizon
Social Science Research Network, 2017Co-Authors: Haim Levy, Moshe LevyAbstract:Prospect Theory (PT) and Constant Relative Risk Aversion (CRRA) have clear-cut implications for the optimal asset allocation between stocks and the risk-free asset as a function of the Investment Horizon. While CRRA preferences imply that the allocation should be independent of the Horizon, we show that PT implies a dramatic and discontinuous “jump” to the maximal possible allocation to stocks as the Horizon increases. We experimentally test these predictions at the individual level. We find very little support for PT with at most 6% of the choices supporting it. We find much stronger support for CRRA with 32%-44% of the choices conforming to it. Moreover, the aggregate allocation, which is relevant for asset pricing, conforms to CRRA. These findings provide some justification for economic models employing CRRA preferences, and suggest that the equity premium puzzle is yet to be solved.
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mean variance stochastic dominance and the Investment Horizon
2016Co-Authors: Haim LevyAbstract:As some investors plan to invest for a relatively short Investment Horizon and others for a relatively long Horizon, it is interesting to analyze whether the assumed length of the Investment Horizon affects the optimal diversification. Numerous studies are devoted to this topic. Indeed, the importance of the Investment Horizon and its effect on the Investment strategy is well documented in the financial and economic literature. Regarding the optimal stock-bond optimal mix, it is commonly recommended that the longer the Horizon the larger should be the weight of stocks in the portfolio, see for example Malkiel. Not all agree with this approach (see for example Merton and Samuelson who employ myopic CRRA preferences). Obviously, transaction costs affect the trading strategy for a given finite Horizon. Jagannathan and Kocherlakota show that even with CRRA preferences if investors, due to transaction costs, are restricted to buy and hold policy, the obtained optimal portfolio is Horizon dependent. Liu and Loewenstein show that with transaction costs and with CRRA preference, investors with a relatively short Horizon will buy less of the risky asset and basically adhere to the buy and hold policy. Thus, it is important to analyze the effect of the assumed Investment Horizon on the portfolio selection under i.i.d. assumption with no transaction costs. We show that even in this framework the portfolio optimal diversification and the performance measure are affected by the assumed Horizon, with the exception of portfolios constructed with the CRRA preference. Specifically, we find that the MV and SSD efficient sets and the Sharpe index are Horizon dependent.
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stochastic dominance Investment decision making under uncertainty
2010Co-Authors: Haim LevyAbstract:Preface. 1. On the Measurement of Risk. 2. Expected Utility Theory. 3. Stochastic Dominance Decision Rules. 4. Stochastic Dominance: The Quantile Approach. 5. Algorithms for Stochastic Dominance. 6. Stochastic Dominance with Specific Distributions. 7. The Empirical Studies. 8. Applications of Stochastic Dominance Rules. 9. Stochastic Dominance and Risk Measures. 10. Stochastic Dominance and Diversification. 11. Decision Making and the Investment Horizon. 12. The CAPM and Stochastic Dominance. 13. Non-Expected Utility and Stochastic Dominance. 14. Future Research.
Moshe Levy - One of the best experts on this subject based on the ideXlab platform.
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prospect theory constant relative risk aversion and the Investment Horizon
PLOS ONE, 2021Co-Authors: Haim Levy, Moshe LevyAbstract:Prospect Theory (PT) and Constant-Relative-Risk-Aversion (CRRA) preferences have clear-cut and very different implications for the optimal asset allocation between a riskless asset and a risky stock as a function of the Investment Horizon. While CRRA implies that the optimal allocation is independent of the Horizon, we show that PT implies a dramatic and discontinuous "jump" in the optimal allocation as the Horizon increases. We experimentally test these predictions at the individual level. We find rather strong support for CRRA, but very little support for PT.
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stocks versus bonds and the Investment Horizon
Social Science Research Network, 2019Co-Authors: Haim Levy, Moshe LevyAbstract:Many investors and institutions have a long-run Investment perspective, hence the question of stocks versus bonds in the long-run is of central importance. Despite the great deal of research attention devoted to this issue, views remain conflicting. Indeed, neither stocks nor bonds dominate when compared in isolation, but we show that incorporating into the analysis the long-term riskless asset (TIPS) offers a clear-cut resolution. For any Horizon greater than 3 years, stocks dominate bonds by First-degree Stochastic Dominance with a Riskless asset (FSDR). This implies that for any combination of bonds with TIPS, there exists a combination of stocks with TIPS that dominates it for any investor with non-decreasing preferences. Thus, the dominance of stocks over bonds for the long-run holds not only for expected utility maximizers, but also for Prospect Theory investors and investors with various aspiration levels as well.
-
prospect theory constant relevant risk aversion and the Investment Horizon
Social Science Research Network, 2017Co-Authors: Haim Levy, Moshe LevyAbstract:Prospect Theory (PT) and Constant Relative Risk Aversion (CRRA) have clear-cut implications for the optimal asset allocation between stocks and the risk-free asset as a function of the Investment Horizon. While CRRA preferences imply that the allocation should be independent of the Horizon, we show that PT implies a dramatic and discontinuous “jump” to the maximal possible allocation to stocks as the Horizon increases. We experimentally test these predictions at the individual level. We find very little support for PT with at most 6% of the choices supporting it. We find much stronger support for CRRA with 32%-44% of the choices conforming to it. Moreover, the aggregate allocation, which is relevant for asset pricing, conforms to CRRA. These findings provide some justification for economic models employing CRRA preferences, and suggest that the equity premium puzzle is yet to be solved.
Martin Hoesli - One of the best experts on this subject based on the ideXlab platform.
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real estate in mixed asset portfolios for various Investment Horizons
The Journal of Portfolio Management, 2019Co-Authors: Jeanchristophe Delfim, Martin HoesliAbstract:In this article, the authors investigate the role of real estate in a mixed-asset portfolio for various Investment Horizons and notably extend the literature by considering together direct real estate, real estate Investment trusts (REITs), and nonlisted real estate funds, as well as other alternative Investments. Using US data spanning almost three decades, they report that medium- to long-term investors should allocate 10% to 20% of their portfolio to direct real estate. In contrast, short-term investors should focus on open-end core funds, which are found to be good substitutes for direct Investments. REITs are usually of limited interest as a substitute for direct real estate, but they could be used in conjunction with direct Investments for medium- and long-term Horizons. Value-added and opportunistic closed-end funds are found to be imperfect substitutes for direct Investments and are only marginally used. Finally, the authors find that including commodities, private equity, and hedge funds in a portfolio enhances the portfolio’s performance but the allocation to real estate barely changes. TOPICS:Statistical methods, real estate, risk management, portfolio construction Key Findings • Allocation to direct real estate is null until a 2.5-year Investment Horizon, due to high transaction costs, but increases rapidly up to 20% for a 25-year Investment Horizon. • Core nonlisted funds are excellent substitutes for direct real estate Investments, which is very useful for short Investment Horizons. • Including other alternative asset classes in the portfolio is useful, but this does not reduce the allocation to real estate.
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are public and private asset returns and risks the same evidence from real estate data
The journal of real estate portfolio management, 2016Co-Authors: Martin Hoesli, Elias OikarinenAbstract:Real estate constitutes a good laboratory to investigate the similarity of public and private asset returns and risks. We find evidence of a one-to-one long-term relation between public and private real estate performance. Also, the return volatilities do not differ significantly between the public and private markets regardless of Investment Horizon. The findings have important implications for portfolio management: (1) public and private real estate are close substitutes in a portfolio with a several-year Investment Horizon and (2) public real estate-related ETFs and derivatives are useful to hedge risks associated with direct real estate holdings or lenders' mortgage inventory.
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are public and private asset returns and risks the same evidence from real estate data
2013Co-Authors: Martin Hoesli, Elias OikarinenAbstract:This article aims to investigate the similarity of public and private real estate returns and risks over the relatively long Horizon using data for the U.S and the U.K. The results show evidence of a one-to-one relationship between publicly traded REIT performance and privately traded direct real estate Investment performance in three out of four U.S. real estate sectors and one out of two U.K. sectors included in the analysis. The return volatilities generally do not differ significantly between the REIT and direct real estate markets regardless of sector and Investment Horizon. The findings have important practical implications. First, they indicate that public and private real estate Investments can be considered to work as good substitutes in an Investment portfolio with several years Investment Horizon. Second, they suggest that REIT related ETFs and derivatives could be used to hedge risks caused by investors’ direct real estate holdings or by lending institutions’ mortgage lending inventory.
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are public and private asset returns and risks the same evidence from real estate data
Swiss Finance Institute Research Paper Series, 2013Co-Authors: Martin Hoesli, Elias OikarinenAbstract:This article investigates the similarity of public and private real estate returns and risks over the long Horizon using data for the U.S and the U.K. The results show evidence of a one-to-one relationship between publicly traded REIT performance and privately traded direct real estate Investment performance in three out of four U.S. real estate sectors and one out of two U.K. sectors. The return volatilities generally do not differ significantly between the REIT and direct real estate markets regardless of Investment Horizon. The findings have important practical implications. First, they indicate that public and private real estate Investments can be considered to work as good substitutes in an Investment portfolio with several years Investment Horizon. Second, they suggest that REIT related ETFs and derivatives could be used to hedge risks caused by investors’ direct real estate holdings or by lending institutions’ mortgage lending inventory.
Steffen P Sebastian - One of the best experts on this subject based on the ideXlab platform.
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dynamics of commercial real estate asset markets return volatility and the Investment Horizon
Social Science Research Network, 2011Co-Authors: Christian Rehring, Steffen P SebastianAbstract:The term structure of return volatility is estimated for both UK and US direct and securitized commercial real estate, using vector auto-regressions. In a similar manner to the general stock market, returns of UK direct real estate and property shares, as well as US real estate Investment trust returns, exhibit strong mean reversion. By contrast, US direct real estate returns show a considerable mean aversion effect over short Investment Horizons. This can be explained by the positive correlation between cash-flow and discount rate news, which can be interpreted as an under-reaction to cash-flow news. When estimating the return volatility of direct real estate markets, long-term investors need not be concerned about the choice of the parameter value used to un-smooth appraisal-based returns, because estimates of long-term volatility are almost unaffected by this choice.
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dynamics of commercial real estate asset markets return volatility and the Investment Horizon
Research Papers in Economics, 2010Co-Authors: Christian Rehring, Steffen P SebastianAbstract:The term structures of return volatility for UK and US direct and securitized commercial real estate are compared using vector autoregressions. To capture the dynamics of the real estate asset markets it is important to include valuation ratios specific to the asset market analyzed. In the UK, direct real estate and property shares exhibit mean reversion, and unexpected returns are primarily driven by news about discount rates. US REIT returns are mean reverting, too. In contrast, US direct real estate shows a considerable mean aversion effect over short Investment Horizons, after which the term structure of the annualized return volatility is slightly decreasing. The low short-term standard deviation and the mean aversion of US direct real estate returns can be explained by the positive correlation between cash-flow and discount rate news. In the UK market, direct real estate returns remain more predictable than property share returns in the medium and long term, whereas US REIT returns appear to be equally predictable to US direct real estate returns at a ten-year Investment Horizon.
Christian Rehring - One of the best experts on this subject based on the ideXlab platform.
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dynamics of commercial real estate asset markets return volatility and the Investment Horizon
Social Science Research Network, 2011Co-Authors: Christian Rehring, Steffen P SebastianAbstract:The term structure of return volatility is estimated for both UK and US direct and securitized commercial real estate, using vector auto-regressions. In a similar manner to the general stock market, returns of UK direct real estate and property shares, as well as US real estate Investment trust returns, exhibit strong mean reversion. By contrast, US direct real estate returns show a considerable mean aversion effect over short Investment Horizons. This can be explained by the positive correlation between cash-flow and discount rate news, which can be interpreted as an under-reaction to cash-flow news. When estimating the return volatility of direct real estate markets, long-term investors need not be concerned about the choice of the parameter value used to un-smooth appraisal-based returns, because estimates of long-term volatility are almost unaffected by this choice.
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dynamics of commercial real estate asset markets return volatility and the Investment Horizon
Research Papers in Economics, 2010Co-Authors: Christian Rehring, Steffen P SebastianAbstract:The term structures of return volatility for UK and US direct and securitized commercial real estate are compared using vector autoregressions. To capture the dynamics of the real estate asset markets it is important to include valuation ratios specific to the asset market analyzed. In the UK, direct real estate and property shares exhibit mean reversion, and unexpected returns are primarily driven by news about discount rates. US REIT returns are mean reverting, too. In contrast, US direct real estate shows a considerable mean aversion effect over short Investment Horizons, after which the term structure of the annualized return volatility is slightly decreasing. The low short-term standard deviation and the mean aversion of US direct real estate returns can be explained by the positive correlation between cash-flow and discount rate news. In the UK market, direct real estate returns remain more predictable than property share returns in the medium and long term, whereas US REIT returns appear to be equally predictable to US direct real estate returns at a ten-year Investment Horizon.
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real estate in a mixed asset portfolio the role of the Investment Horizon
Research Papers in Economics, 2009Co-Authors: Christian RehringAbstract:In this article, three often mentioned special characteristics of the real estate asset market n high transactions costs, lack of liquidity, and return predictability n are addressed in analyzing the role of UK commercial real estate Investments in a mixed asset portfolio. Due to return predictability the annualized twenty-year standard deviation of both stock returns and real estate returns amounts to about 60% of the one-year risk. An illiquidity risk premium accentuates this result with regard to real estate. There are also considerable Horizon effects in correlations. Over Investment Horizons between five and twenty years, and over a wide range of return targets, the weight allocated to real estate is between 13% and 87%. The allocation increases with the Investment Horizon, because the aspects of transactions costs, illiquidity and return predictability all make real estate more favorable for long-term investors. In the long run, real estate appears to be a very good inflation hedge. Traditional meannvariance analysis, i.e. ignoring return predictability, transaction costs and illiquidity, can be very misleading.
