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
516-521
Platanakis, Emmanouil
b92e2284-e82a-4c0c-ad01-c1fd0ec34f9a
Sakkas, Athanasios
5a69d77a-fcea-4e07-bc18-5a8934a4899b
Sutcliffe, Charles
1a8ec184-d880-492f-8714-7312c6884105
2019
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), .
(doi:10.1080/13504851.2018.1486984).
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.
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Regimes 10
- Accepted Manuscript
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
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Date deposited: 05 Oct 2018 11:48
Last modified: 16 Mar 2024 06:53
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Contributors
Author:
Emmanouil Platanakis
Author:
Athanasios Sakkas
Author:
Charles Sutcliffe
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