Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs †

Risks

Jacek B Krawczyk¹ 

[1] Victoria University of Wellington, School of Economics and Finance, PO Box 600, Wellington 6140, New Zealand; E-Mail

关键词: portfolio management;    payoff distributions;    pension funds;    transaction costs;   

DOI  :  10.3390/risks3030318

来源: mdpi

【 摘 要 】

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.

【 授权许可】

CC BY   
© 2015 by the author; licensee MDPI, Basel, Switzerland.