Stocks for the log-run and constant relative risk aversion preferences

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6 Scopus citations

Abstract

Almost Stochastic Dominance implies that stocks are preferred over bonds in the long-run by all preferences with bounded marginal utility. Unfortunately, this analysis excludes the very central Constant Relative Risk Aversion (CRRA) preferences, which have unbounded marginal utility. We derive a simple closed-form solution for the portfolio-choice problem of CRRA investors which, with the empirical parameters, implies that stocks are preferred over bonds for all CRRA investors with relative risk aversion smaller than 3.9. As a by-product, the analysis offers an alternative derivation of the continuous-time CAPM, that does not rely on dynamic programming, and allows for ambiguous investment horizons.

Original languageAmerican English
Pages (from-to)1163-1168
Number of pages6
JournalEuropean Journal of Operational Research
Volume277
Issue number3
DOIs
StatePublished - 19 Sep 2019

Bibliographical note

Publisher Copyright:
© 2019 Elsevier B.V.

Keywords

  • Almost Stochastic Dominance
  • CAPM
  • CRRA preferences
  • Finance
  • Stocks for the long-run

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