Suboptimal investment behavior and welfare costs: A simulation based approach

Pablo Castaneda () and Lorenzo Reus

Finance Research Letters, 2019, vol. 30, issue C, 170-180

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.

Keywords: Asset allocation; Martingale method; Portfolio selection; Suboptimal investment; Monte Carlo simulation; Welfare loss (search for similar items in EconPapers)
JEL-codes: D81 G11 G18 H55 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:30:y:2019:i:c:p:170-180

DOI: 10.1016/j.frl.2018.09.009

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