Economics at your fingertips  

Asset allocation with distorted beliefs and transaction costs

Roman Kozhan () and Wolfgang Schmid

European Journal of Operational Research, 2009, vol. 194, issue 1, 236-249

Abstract: In this paper we study the problem of the optimal portfolio selection with transaction costs for a decision-maker who is faced with Knightian uncertainty. The decision-maker's portfolio consists of one risky and one risk-free asset, and we assume that the transaction costs are proportional to the traded volume of the risky asset. The attitude to uncertainty is modeled by the Choquet expected utility. We derive optimal strategies and bounds of the no-transaction region for both optimistic and pessimistic decision-makers. The no-transaction region of a pessimistic investor is narrower and its bounds lie closer to the origin than that of an optimistic trader. Moreover, under the Choquet expected utility the structure of the no-transaction region is not necessarily a closed interval as it is under the standard expected utility model.

Keywords: Knightian; uncertainty; Asset; allocation; Distortion; function; Transaction; costs (search for similar items in EconPapers)
Date: 2009
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this article

European Journal of Operational Research is currently edited by Roman Slowinski, Jesus Artalejo, Jean-Charles. Billaut, Robert Dyson and Lorenzo Peccati

More articles in European Journal of Operational Research from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-12-31
Handle: RePEc:eee:ejores:v:194:y:2009:i:1:p:236-249