Next Article in Journal
Valuation of Index-Linked Cash Flows in a Heath–Jarrow–Morton Framework
Previous Article in Journal
Life Insurance Cash Flows with Policyholder Behavior
Article

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

Victoria University of Wellington, School of Economics and Finance, PO Box 600, Wellington 6140, New Zealand
This paper is an extended version of a paper under the same title presented by the author at the Quantitative Methods in Finance 2013 Conference, Sydney, Australia. It was further revised while the author was a visiting scholar at the Department of Mathematics at Macquarie University, Sydney, NSW 2109.
Academic Editor: Andrea Consiglio
Risks 2015, 3(3), 318-337; https://doi.org/10.3390/risks3030318
Received: 10 January 2015 / Accepted: 11 August 2015 / Published: 21 August 2015
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. View Full-Text
Keywords: portfolio management; payoff distributions; pension funds; transaction costs portfolio management; payoff distributions; pension funds; transaction costs
Show Figures

Graphical abstract

MDPI and ACS Style

Krawczyk, J.B. Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs. Risks 2015, 3, 318-337. https://doi.org/10.3390/risks3030318

AMA Style

Krawczyk JB. Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs. Risks. 2015; 3(3):318-337. https://doi.org/10.3390/risks3030318

Chicago/Turabian Style

Krawczyk, Jacek B. 2015. "Delivering Left-Skewed Portfolio Payoff Distributions in the Presence of Transaction Costs" Risks 3, no. 3: 318-337. https://doi.org/10.3390/risks3030318

Find Other Styles

Article Access Map by Country/Region

1
Only visits after 24 November 2015 are recorded.
Back to TopTop