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Asset allocation with distorted beliefs and transaction costs
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Kozhan, Roman and Schmid, Wolfgang. (2009) Asset allocation with distorted beliefs and transaction costs. European Journal of Operational Research, Vol.194 (No.1). pp. 236-249. ISSN 0377-2217
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Official URL: http://dx.doi.org/10.1016/j.ejor.2007.12.002
Abstract
In this paper we study the problem of the optimal portfolio selection with transaction costs for a decision-maker who is faced with Knightian uncertainty. The decision-maker's portfolio consists of one risky and one risk-free asset, and we assume that the transaction costs are proportional to the traded volume of the risky asset. The attitude to uncertainty is modeled by the Choquet expected utility, We derive optimal strategies and bounds of the no-transaction region for both optimistic and pessimistic decision-makers. The no-transaction region of a pessimistic investor is narrower and its bounds lie closer to the origin than that of an optimistic trader. Moreover, under the Choquet expected utility the structure of the no-transaction region is not necessarily a closed interval as it is under the standard expected utility model. (c) 2007 Elsevier B.V. All rights reserved.
| Item Type: | Journal Article |
|---|---|
| Subjects: | H Social Sciences > HD Industries. Land use. Labor > HD28 Management. Industrial Management H Social Sciences > HG Finance |
| Divisions: | Faculty of Social Sciences > Warwick Business School > Financial Econometrics Research Centre Faculty of Social Sciences > Warwick Business School > Finance Group Faculty of Social Sciences > Warwick Business School |
| Journal or Publication Title: | European Journal of Operational Research |
| Publisher: | Elsevier Science BV |
| ISSN: | 0377-2217 |
| Date: | 1 April 2009 |
| Volume: | Vol.194 |
| Number: | No.1 |
| Number of Pages: | 14 |
| Page Range: | pp. 236-249 |
| Identification Number: | 10.1016/j.ejor.2007.12.002 |
| Status: | Peer Reviewed |
| Publication Status: | Published |
| Access rights to Published version: | Restricted or Subscription Access |
| URI: | http://wrap.warwick.ac.uk/id/eprint/28981 |
Data sourced from Thomson Reuters' Web of Knowledge
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