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Portfolio selection with mental accounts: An equilibrium model with endogenous risk aversion

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  • Alexander, Gordon J.
  • Baptista, Alexandre M.
  • Yan, Shu
Abstract
In Das et al. (2010), an agent divides his or her wealth among mental accounts that have different goals and optimal portfolios. While the moments of the distribution of asset returns are exogenous in their normative model, they are endogenous in our corresponding positive model. We obtain the following results. First, there are multiple equilibria that we parameterize by the implied risk aversion coefficient of the agent’s aggregate portfolio. Second, equilibrium asset prices and the composition of optimal portfolios within accounts depend on this coefficient. Third, altering the goal of any given account affects the composition of each portfolio.

Suggested Citation

  • Alexander, Gordon J. & Baptista, Alexandre M. & Yan, Shu, 2020. "Portfolio selection with mental accounts: An equilibrium model with endogenous risk aversion," Journal of Banking & Finance, Elsevier, vol. 110(C).
    • Handle: RePEc:eee:jbfina:v:110:y:2020:i:c:s0378426619301669
    DOI: 10.1016/j.jbankfin.2019.07.019
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    Cited by:

    1. Chiu, Wan-Yi, 2022. "Another look at portfolio optimization with mental accounts," Applied Mathematics and Computation, Elsevier, vol. 419(C).

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    More about this item

    Keywords

    Portfolio selection; Mental accounts; Equilibrium; Endogenous risk aversion; Behavioral finance; Mean-variance model;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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