Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs
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...
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| Format: | Article |
| Language: | English |
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MDPI AG
2015-08-01
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| Series: | Risks |
| Subjects: | |
| Online Access: | http://www.mdpi.com/2227-9091/3/3/318 |
| _version_ | 1818363991093673984 |
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| author | Jacek B Krawczyk |
| author_facet | Jacek B Krawczyk |
| author_sort | Jacek B Krawczyk |
| collection | DOAJ |
| description | 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. |
| first_indexed | 2024-12-13T21:57:16Z |
| format | Article |
| id | doaj.art-1fdfc2c1c6934aab8d8abaa02ac42db9 |
| institution | Directory Open Access Journal |
| issn | 2227-9091 |
| language | English |
| last_indexed | 2024-12-13T21:57:16Z |
| publishDate | 2015-08-01 |
| publisher | MDPI AG |
| record_format | Article |
| series | Risks |
| spelling | doaj.art-1fdfc2c1c6934aab8d8abaa02ac42db92022-12-21T23:30:06ZengMDPI AGRisks2227-90912015-08-013331833710.3390/risks3030318risks3030318Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction CostsJacek B Krawczyk0Victoria University of Wellington, School of Economics and Finance, PO Box 600, Wellington 6140, New ZealandFor 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.http://www.mdpi.com/2227-9091/3/3/318portfolio managementpayoff distributionspension fundstransaction costs |
| spellingShingle | Jacek B Krawczyk Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs Risks portfolio management payoff distributions pension funds transaction costs |
| title | Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs |
| title_full | Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs |
| title_fullStr | Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs |
| title_full_unstemmed | Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs |
| title_short | Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs |
| title_sort | delivering left skewed portfolio payoff distributions in the presence of transaction costs |
| topic | portfolio management payoff distributions pension funds transaction costs |
| url | http://www.mdpi.com/2227-9091/3/3/318 |
| work_keys_str_mv | AT jacekbkrawczyk deliveringleftskewedportfoliopayoffdistributionsinthepresenceoftransactioncosts |