Behavior Finance and Estimation Risk in Stochastic Portfolio Optimization

55 Pages Posted: 18 Jan 2007 Last revised: 5 May 2008

See all articles by Jose L. B. Fernandes

Jose L. B. Fernandes

Universidade de Brasília

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration

Benjamin M. Tabak

FGV/EPPG

Abstract

The objective of this paper is twofold. The first is to incorporate mental accounting, loss aversion, asymmetric risk-taking behavior, and probability weighting in a multi-period portfolio optimization for individual investors. While these behavioral biases have previously been identified in the literature, their overall impact during the determination of optimal asset allocation in a multi-period analysis is still missing. The second objective is to account for the estimation risk in the analysis. Considering 26 daily index stock data over the period from 1995 to 2007, we empirically evaluate our model (BRATE - Behavior Resample Technique) against the traditional Markowitz model.

Keywords: Behavior, Portfolio Optimization, Resampling

JEL Classification: G11

Suggested Citation

Fernandes, Jose Luiz Barros and Peña, Juan Ignacio and Tabak, Benjamin M., Behavior Finance and Estimation Risk in Stochastic Portfolio Optimization. Available at SSRN: https://ssrn.com/abstract=957334 or http://dx.doi.org/10.2139/ssrn.957334

Jose Luiz Barros Fernandes (Contact Author)

Universidade de Brasília ( email )

Campus Universitário Darcy Ribeiro
Brasília, Distrito Federal 70910-900
Brazil

Juan Ignacio Peña

Universidad Carlos III de Madrid - Department of Business Administration ( email )

Calle Madrid 126
Getafe, Madrid, Madrid 28903
Spain
34 91 624 9625 (Phone)
34 91 624 9608 (Fax)

Benjamin M. Tabak

FGV/EPPG ( email )

SGAN Av. L2 Norte - Quadra 602 - Módulos A, B e C
Brasília, Rio de Janeiro 70830-051
Brazil

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