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The investment horizon problem: A resolution

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  • Aase, Knut K.

    (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)

Abstract

In the canonical model of investments, the optimal fractions in the risky assets do not depend on the time horizon. This is against empirical evidence, and against the typical recommendations of portfolio managers. We demonstrate that if the intertemporal coefficient of relative risk aversion is allowed to depend on time, or the age of the investor, the investment horizon problem can be resolved. Accordingly, the only standard assumption in applied economics/finance that we relax in order to obtain our conclusion, is the state and time separability of the intertemporal felicity index in the investor’s utility function. We include life and pension insurance, and we also demonstrate that preferences aggregate.

Suggested Citation

  • Aase, Knut K., 2009. "The investment horizon problem: A resolution," Discussion Papers 2009/7, Norwegian School of Economics, Department of Business and Management Science.
    • Handle: RePEc:hhs:nhhfms:2009_007
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    File URL: http://hdl.handle.net/11250/163980
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    Citations

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    Cited by:

    1. Aase, Knut K., 2015. "Life Insurance And Pension Contracts I: The Time Additive Life Cycle Model," ASTIN Bulletin, Cambridge University Press, vol. 45(1), pages 1-47, January.
    2. Tahir Choulli & Sina Yansori, 2018. "Explicit description of all deflators for market models under random horizon with applications to NFLVR," Papers 1803.10128, arXiv.org, revised Feb 2021.
    3. Steffensen, Mogens, 2011. "Optimal consumption and investment under time-varying relative risk aversion," Journal of Economic Dynamics and Control, Elsevier, vol. 35(5), pages 659-667, May.

    More about this item

    Keywords

    The investment horizon problem; complete markets; life and pension insurance; dynamic programming; Kuhn-Tucker; directional derivatives; time consistency; aggregation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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