The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

Emmanouil Platanakis, Athanasios Sakkas, Charles Sutcliffe

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)
22 Downloads (Pure)

Abstract

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.

Original languageEnglish
Pages (from-to)516-521
Number of pages6
JournalApplied Economics Letters
Volume26
Issue number6
Early online date18 Jun 2018
DOIs
Publication statusPublished - 30 Mar 2019

Keywords

  • constant relative risk aversion
  • Portfolio theory
  • regime shifting
  • risk aversion
  • transaction costs

ASJC Scopus subject areas

  • Economics and Econometrics

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