Delivering left-skewed portfolio payoff distributions in the presence of transaction costs

Artikel

For pension-savers, a low payoff is a financial disaster. Such investors will most likely prefer left-skewed payoff distributions over right-skewed payoff distributions. We explore how such distributions can be delivered. Cautious-relaxed utility measures are cautious in ensuring that payoffs don't fall much below a reference value, but relaxed about exceeding it. We find that the payoff distribution delivered by a cautious-relaxed utility measure has appealing features which payoff distributions delivered by traditional utility functions don't. In particular, cautious-relaxed distributions can have the mass concentrated on the left, hence be left-skewed. However, cautious-relaxed strategies prescribe frequent portfolio adjustments which may be expensive if transaction costs are charged. In contrast, more traditional strategies can be time-invariant. Thus we investigate the impact of transaction costs on the appeal of cautious-relaxed strategies. We find that relatively high transaction fees are required for the cautious-relaxed strategy to lose its appeal. This paper contributes to the literature which compares utility measures by the payoff distributions they produce and finds that a cautious-relaxed utility measure will deliver payoffs that many investors will prefer.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Journal: Risks ; ISSN: 2227-9091 ; Volume: 3 ; Year: 2015 ; Issue: 3 ; Pages: 318-337 ; Basel: MDPI

Classification and Topics

• Classification: Wirtschaft ; Portfolio Choice; Investment Decisions ; Optimization Techniques; Programming Models; Dynamic Analysis ; Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
• Subject: portfolio management ; payoff distributions ; pension funds ; transaction costs

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Krawczyk, Jacek B.
• Event: Veröffentlichung
• (who): MDPI
• (where): Basel
• (when): 2015

Further information

• DOI: doi:10.3390/risks3030318
• Handle: http://hdl.handle.net/10419/167859
• Last update: 10.03.2025, 11:45 AM CET