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Risk investment decisions within the deterministic equivalent income model

Yan Song (College of Management Science and Engineering, Shandong University of Finance and Economics, Jinan, China and Qilu Normal University, Jinan, China)
Xin Yun Li (College of Management Science and Engineering, Shandong University of Finance and Economics, Jinan, China)
Yi Li (Bank of Communications, Jinan, China)
Xianpei Hong (School of Business Administration, Guangdong University of Finance and Economics, Guangzhou, China)

Kybernetes

ISSN: 0368-492X

Article publication date: 2 March 2020

Abstract

Purpose

The purpose of this paper is to establish a deterministic equivalent income model (DEIM) based on the risk cost (RC) and risk aversion of investors. The model fully considers both subjective and objective factors that affect risk investment and reasonably evaluates risk investment schemes to choose the correct investment scheme and gain greater investment returns.

Design/methodology/approach

The utility function is used to measure the extent to which an investor is satisfied by investment returns in various scenarios. Risk aversion expresses subjective attitude of investors to risk. RC represents risk loss in currency. This methodology is based on risk aversion function, utility function and RC theory to establish DEIM.

Findings

This study shows that investors with different risk preferences have different certainty equivalent returns (CER), so their choices of investment options change accordingly.

Practical implications

In this paper, the authors use DEIM to test an investment case and conclude that the CER and investment scheme both change with different risk preferences. At the same time, case analysis shows that DEIM is reasonable and stable when evaluating risk investment schemes.

Originality/value

In this study, the authors innovate by introducing both the RC and risk aversion degree into risk investment schemes evaluation and by deriving a utility function from the absolute risk aversion function to build a utility decision matrix and establish DEIM. The model combines the subjective and objective factors that influence risk investment decisions.

Keywords

Acknowledgements

The work was supported by the Shandong Natural Science Foundation Project (Grant No. 2016ZRB01A9L), Major Projects of Soft Science in Shandong (Grant No.2016RZB01045), the State Key Program of National Natural Science of China (71671104).

Citation

Song, Y., Li, X.Y., Li, Y. and Hong, X. (2020), "Risk investment decisions within the deterministic equivalent income model", Kybernetes, Vol. 50 No. 2, pp. 616-632. https://doi.org/10.1108/K-04-2019-0275

Publisher

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Emerald Publishing Limited

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