Differences Between Short- and Long-Term Risk Aversion: An Optimal Asset Allocation Perspective Articles uri icon

publication date

  • February 2019

start page

  • 42

end page

  • 61


  • 1


  • 81

International Standard Serial Number (ISSN)

  • 0305-9049

Electronic International Standard Serial Number (EISSN)

  • 1468-0084


  • This paper studies the long‐term asset allocation problem of an investor with different risk aversion attitudes to the short and the long term. We characterize investor's preferences with a utility function exhibiting a regime shift in risk aversion at some point of the multiperiod investment horizon that is estimated using threshold nonlinearity methods. Our empirical results for a portfolio of cash, bonds and stocks suggest that long‐term risk aversion is higher than short‐term risk aversion and increases with the investment horizon. The exposure of the investment portfolio from stocks to bonds and cash increases with the degree of risk aversion.


  • economic models; risk aversion; asset allocation; nuisance parameter; expected returns; portfolio; inference; selection; predictability; consumption; tests; model