The University of Southampton
University of Southampton Institutional Repository

The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models
The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.

constant relative risk aversion, Portfolio theory, regime shifting, risk aversion, transaction costs
1350-4851
516-521
Platanakis, Emmanouil
b92e2284-e82a-4c0c-ad01-c1fd0ec34f9a
Sakkas, Athanasios
5a69d77a-fcea-4e07-bc18-5a8934a4899b
Sutcliffe, Charles
1a8ec184-d880-492f-8714-7312c6884105
Platanakis, Emmanouil
b92e2284-e82a-4c0c-ad01-c1fd0ec34f9a
Sakkas, Athanasios
5a69d77a-fcea-4e07-bc18-5a8934a4899b
Sutcliffe, Charles
1a8ec184-d880-492f-8714-7312c6884105

Platanakis, Emmanouil, Sakkas, Athanasios and Sutcliffe, Charles (2019) The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models. Applied Economics Letters, 26 (6), 516-521. (doi:10.1080/13504851.2018.1486984).

Record type: Article

Abstract

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.

Text
Regimes 10 - Accepted Manuscript
Download (421kB)

More information

Accepted/In Press date: 16 June 2018
e-pub ahead of print date: 18 June 2018
Published date: 2019
Keywords: constant relative risk aversion, Portfolio theory, regime shifting, risk aversion, transaction costs

Identifiers

Local EPrints ID: 424825
URI: http://eprints.soton.ac.uk/id/eprint/424825
ISSN: 1350-4851
PURE UUID: b9870c20-5ce4-4815-affb-a9d3e83f26cb
ORCID for Athanasios Sakkas: ORCID iD orcid.org/0000-0001-5348-3382

Catalogue record

Date deposited: 05 Oct 2018 11:48
Last modified: 28 Apr 2022 05:57

Export record

Altmetrics

Contributors

Author: Emmanouil Platanakis
Author: Athanasios Sakkas ORCID iD
Author: Charles Sutcliffe

Download statistics

Downloads from ePrints over the past year. Other digital versions may also be available to download e.g. from the publisher's website.

View more statistics

Atom RSS 1.0 RSS 2.0

Contact ePrints Soton: eprints@soton.ac.uk

ePrints Soton supports OAI 2.0 with a base URL of http://eprints.soton.ac.uk/cgi/oai2

This repository has been built using EPrints software, developed at the University of Southampton, but available to everyone to use.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we will assume that you are happy to receive cookies on the University of Southampton website.

×