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Portfolio selection with mental accounts and estimation risk

Gordon Alexander (), Alexandre Baptista () and Shu Yan ()

Journal of Empirical Finance, 2017, vol. 41, issue C, 161-186

Abstract: In Das, Markowitz, Scheid, and Statman (2010), an investor divides his or her wealth among mental accounts with short selling being allowed. For each account, there is a unique goal and optimal portfolio. Our paper complements theirs by considering estimation risk. We theoretically characterize the existence and composition of optimal portfolios within accounts. Based on simulated and empirical data, there is a wide range of account goals for which such portfolios notably outperform those selected with the mean-variance model for plausible risk aversion coefficients. When short selling is disallowed, the outperformance still typically holds but to a considerably lesser extent.

Keywords: Portfolio selection; Mental accounts; Estimation risk; Behavioral finance (search for similar items in EconPapers)
JEL-codes: G11 D81 (search for similar items in EconPapers)
Date: 2017
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:41:y:2017:i:c:p:161-186