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Investment horizon ant the attractiveness of investment strategies: A behavioral approach


Dierkes, Maik; Erner, Carsten; Zeisberger, Stefan (2010). Investment horizon ant the attractiveness of investment strategies: A behavioral approach. Journal of Banking and Finance, 34(5):1032-1046.

Abstract

We analyze the attractiveness of investment strategies over a variety of investment horizons from the viewpoint of an investor with preferences described by Cumulative Prospect Theory (CPT), currently the most prominent descriptive theory for decision making under uncertainty. A bootstrap technique is applied using historical return data of 1926–2008. To allow for variety in investors’ preferences, we conduct several sensitivity analyses and further provide robustness checks for the results. In addition, we analyze the attractiveness of the investment strategies based on a set of experimentally elicited preference parameters. Our study reveals that strategy attractiveness substantially depends on the investment horizon. While for almost every preference parameter combination a bond strategy is preferred for the short run, stocks show an outperformance for longer horizons. Portfolio insurance turns out to be attractive for almost every investment horizon. Interestingly, we find probability weighting to be a driving factor for insurance strategies’ attractiveness.

Abstract

We analyze the attractiveness of investment strategies over a variety of investment horizons from the viewpoint of an investor with preferences described by Cumulative Prospect Theory (CPT), currently the most prominent descriptive theory for decision making under uncertainty. A bootstrap technique is applied using historical return data of 1926–2008. To allow for variety in investors’ preferences, we conduct several sensitivity analyses and further provide robustness checks for the results. In addition, we analyze the attractiveness of the investment strategies based on a set of experimentally elicited preference parameters. Our study reveals that strategy attractiveness substantially depends on the investment horizon. While for almost every preference parameter combination a bond strategy is preferred for the short run, stocks show an outperformance for longer horizons. Portfolio insurance turns out to be attractive for almost every investment horizon. Interestingly, we find probability weighting to be a driving factor for insurance strategies’ attractiveness.

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10 citations in Web of Science®
13 citations in Scopus®
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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:May 2010
Deposited On:15 Nov 2010 16:55
Last Modified:05 Apr 2016 14:16
Publisher:Elsevier
ISSN:0378-4266
Publisher DOI:https://doi.org/10.1016/j.jbankfin.2009.11.003

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