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

Platanakis, E., Sakkas, A. and Sutcliffe, C. (2018) The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models. Applied Economics Letters. ISSN 1466-4291

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To link to this item DOI: 10.1080/13504851.2018.1486984

Abstract/Summary

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.

Item Type:Article
Refereed:Yes
Divisions:Henley Business School > ICMA Centre
ID Code:77114
Publisher:Taylor & Francis

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