Behavior Finance and Estimation Risk in Portfolio Optimization Articles uri icon

publication date

  • July 2010

start page

  • 719

end page

  • 738

issue

  • 9

volume

  • 20

International Standard Serial Number (ISSN)

  • 0960-3107

Electronic International Standard Serial Number (EISSN)

  • 1466-4305

abstract

  • The objective of this article is twofold. The first is to incorporate mental accounting, loss-aversion, asymmetric risk-taking behaviour and probability weighting in a multi-period portfolio optimization for
    individual investors. While these behavioural 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 (Behaviour
    Resample Adjusted Technique-BRATE) against the traditional Markowitz
    model.