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Author |
Castaneda, P.; Reus, L. |
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Title |
Suboptimal investment behavior and welfare costs: A simulation based approach |
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Year |
2019 |
Publication |
Finance Research Letters |
Abbreviated Journal |
Financ. Res. Lett. |
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Volume |
30 |
Issue |
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Pages  |
170-180 |
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Keywords |
Asset allocation; Martingale method; Portfolio selection; Suboptimal investment; Monte Carlo simulation; Welfare loss |
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Abstract |
We propose a representation of suboptimal investment behavior based on the stochastic discount factor (SDF) paradigm. Suboptimal investment behavior is rationalized as being the investor's optimal decision under a wrong SDF, while wealth trajectories and budget constraints are based on the true SDF. We develop a novel Monte Carlo simulation approach to compute the welfare costs for this suboptimal behavior. We study the suboptimal portfolio choice under CRRA preferences using two financial market models. The Monte Carlo simulation delivers comparable welfare losses to those computed in the original studies, which are based on partial differential equations (PDE) and – finite-difference schemes. |
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Address |
[Castaneda, Pablo] Univ Adolfo lbanez, Business Sch, Diagonal Las Torres 2640, Santiago, Chile, Email: pablo.castaneda@uai.cl; |
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Publisher |
Academic Press Inc Elsevier Science |
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English |
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ISSN |
1544-6123 |
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Notes |
WOS:000487349000024 |
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Call Number |
UAI @ eduardo.moreno @ |
Serial |
1169 |
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Author |
Reus, L.; Carrasco, J.A.; Pincheira, P. |
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Title |
Do it with a smile: Forecasting volatility with currency options |
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Year |
2020 |
Publication |
Finance Research Letters |
Abbreviated Journal |
Financ. Res. Lett. |
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Volume |
34 |
Issue |
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Pages |
10 pp |
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Keywords |
Volatility forecast; Volatility smile; Latin American markets; Currency options |
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Abstract |
We show that traditional measures of curvature and symmetry of the “smiles” improve volatility predictions in forex markets. We consider post crisis data at a daily basis for seven currencies vis a vis the American dollar: The British pound, the Euro, the Australian dollar, the Japanese yen, the Brazilian real and the Mexican and Chilean peso. While our results are robust to the option currency and maturity, they are particularly strong for latin-American currencies and options with longer maturity. We find that the simultaneous inclusion of skewness and kurtosis to a forecasting model significantly improves its predictive accuracy. |
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Address |
[Reus, Lorenzo; Carrasco, Jose A.] Univ Adolfo Ibanez, Fac Ingn & Ciencias, Santiago 2640, Chile, Email: lorenzo.reus@uai.cl; |
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Publisher |
Academic Press Inc Elsevier Science |
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Language |
English |
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Series Volume |
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ISSN |
1544-6123 |
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Notes |
WOS:000551346400022 |
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Call Number |
UAI @ eduardo.moreno @ |
Serial |
1209 |
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