Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/167859 
Year of Publication: 
2015
Citation: 
[Journal:] Risks [ISSN:] 2227-9091 [Volume:] 3 [Issue:] 3 [Publisher:] MDPI [Place:] Basel [Year:] 2015 [Pages:] 318-337
Publisher: 
MDPI, Basel
Abstract: 
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.
Subjects: 
portfolio management
payoff distributions
pension funds
transaction costs
JEL: 
G11
C61
J32
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Appears in Collections:

Files in This Item:
File
Size
534.74 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.