Long-Run Savings and Investment Strategy Optimization
We focus on automatic strategies to optimize life cycle savings and investment. Classical optimal savings theory establishes that, given the level of risk aversion, a saver would keep the same relative amount invested in risky assets at any given time. We show that, when optimizing lifecycle investm...
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| Format: | Article |
| Language: | English |
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Wiley
2014-01-01
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| Series: | The Scientific World Journal |
| Online Access: | http://dx.doi.org/10.1155/2014/510531 |
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| _version_ | 1832545288705802240 |
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| author | Russell Gerrard Montserrat Guillén Jens Perch Nielsen Ana M. Pérez-Marín |
| author_facet | Russell Gerrard Montserrat Guillén Jens Perch Nielsen Ana M. Pérez-Marín |
| author_sort | Russell Gerrard |
| collection | DOAJ |
| description | We focus on automatic strategies to optimize life cycle savings and investment. Classical optimal savings theory establishes that, given the level of risk aversion, a saver would keep the same relative amount invested in risky assets at any given time. We show that, when optimizing lifecycle investment, performance and risk assessment have to take into account the investor’s risk aversion and the maximum amount the investor could lose, simultaneously. When risk aversion and maximum possible loss are considered jointly, an optimal savings strategy is obtained, which follows from constant rather than relative absolute risk aversion. This result is fundamental to prove that if risk aversion and the maximum possible loss are both high, then holding a constant amount invested in the risky asset is optimal for a standard lifetime saving/pension process and outperforms some other simple strategies. Performance comparisons are based on downside risk-adjusted equivalence that is used in our illustration. |
| format | Article |
| id | doaj-art-24658b1d7fea424e84635ed9719c87c0 |
| institution | Kabale University |
| issn | 2356-6140 1537-744X |
| language | English |
| publishDate | 2014-01-01 |
| publisher | Wiley |
| record_format | Article |
| series | The Scientific World Journal |
| spelling | doaj-art-24658b1d7fea424e84635ed9719c87c02025-02-03T07:26:10ZengWileyThe Scientific World Journal2356-61401537-744X2014-01-01201410.1155/2014/510531510531Long-Run Savings and Investment Strategy OptimizationRussell Gerrard0Montserrat Guillén1Jens Perch Nielsen2Ana M. Pérez-Marín3Cass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UKDepartment of Econometrics, Riskcenter-IREA, University of Barcelona, Avenue Diagonal 690, 08034 Barcelona, SpainCass Business School, City University London, 106 Bunhill Row, London EC1Y 8TZ, UKDepartment of Econometrics, Riskcenter-IREA, University of Barcelona, Avenue Diagonal 690, 08034 Barcelona, SpainWe focus on automatic strategies to optimize life cycle savings and investment. Classical optimal savings theory establishes that, given the level of risk aversion, a saver would keep the same relative amount invested in risky assets at any given time. We show that, when optimizing lifecycle investment, performance and risk assessment have to take into account the investor’s risk aversion and the maximum amount the investor could lose, simultaneously. When risk aversion and maximum possible loss are considered jointly, an optimal savings strategy is obtained, which follows from constant rather than relative absolute risk aversion. This result is fundamental to prove that if risk aversion and the maximum possible loss are both high, then holding a constant amount invested in the risky asset is optimal for a standard lifetime saving/pension process and outperforms some other simple strategies. Performance comparisons are based on downside risk-adjusted equivalence that is used in our illustration.http://dx.doi.org/10.1155/2014/510531 |
| spellingShingle | Russell Gerrard Montserrat Guillén Jens Perch Nielsen Ana M. Pérez-Marín Long-Run Savings and Investment Strategy Optimization The Scientific World Journal |
| title | Long-Run Savings and Investment Strategy Optimization |
| title_full | Long-Run Savings and Investment Strategy Optimization |
| title_fullStr | Long-Run Savings and Investment Strategy Optimization |
| title_full_unstemmed | Long-Run Savings and Investment Strategy Optimization |
| title_short | Long-Run Savings and Investment Strategy Optimization |
| title_sort | long run savings and investment strategy optimization |
| url | http://dx.doi.org/10.1155/2014/510531 |
| work_keys_str_mv | AT russellgerrard longrunsavingsandinvestmentstrategyoptimization AT montserratguillen longrunsavingsandinvestmentstrategyoptimization AT jensperchnielsen longrunsavingsandinvestmentstrategyoptimization AT anamperezmarin longrunsavingsandinvestmentstrategyoptimization |