Mental accounts with horizon and asymmetry preferences

[en] This paper extends mental accounting theory with an investment horizon and asymmetric trade-off between extreme gains and losses. This horizon-asymmetry mental accounting (HAMA) framework widens the spectrum of investors’ optimal portfolio choices considerably. Risk aversion, implied from the mean-variance portfolio theory, and the bond-to-stock ratio decline with the investment horizon. HAMA investors with a large gain–loss asymmetry trade-off are more concerned about skewness and kurtosis rather than variance. To apply the model to United States stock data, we develop a parsimonious semi-parametric version of HAMA that relies on the moments of return distributions. The analysis of optimal portfolios shows that investors who care significantly about upside potential hold asymmetric, leptokurtic, and less diversified allocations.

Disciplines :

Finance

Author, co-author :

Hübner, Georges ; Université de Liège - ULiège > HEC Liège : UER > UER Finance et Droit : Gestion financière

Lejeune, Thomas ; Université de Liège - ULiège > HEC Liège : UER > UER Economie

Language :

English

Title :

Mental accounts with horizon and asymmetry preferences

Publication date :

October 2021

Journal title :

Economic Modelling

ISSN :

0264-9993

eISSN :

1873-6122

Publisher :

Elsevier, Amsterdam, Netherlands

Volume :

103

Peer reviewed :

Peer Reviewed verified by ORBi

Funders :

F.R.S.-FNRS - Fonds de la Recherche Scientifique [BE]

Available on ORBi :

since 30 August 2021

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