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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 |
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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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UAI @ eduardo.moreno @ |
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1169 |
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