A PERFORMANCE ANALYSIS OF DOLLAR-COST AVERAGING AND SELF-ANNUITIZATION

Richard Lu and Meng-Sung Hsieh ()
Additional contact information
Richard Lu: Department of Risk Management and Insurance, College of Finance, Feng Chia University, No. 100, Wenhwa Road, Seatwen, Taichung City 40724, Taiwan
Meng-Sung Hsieh: Ph.D Program in Finance, College of Finance, Feng Chia University, No. 100, Wenhwa Road, Seatwen, Taichung City 40724, Taiwan

Annals of Financial Economics (AFE), 2019, vol. 14, issue 04, 1-15

Abstract: The return and risk of dollar-cost averaging (DCA) and self-annuitization (SA) investing are compared with the underlying return in this paper. The underlying return, which is assumed to be normally distributed, is generated by Monte Carlo simulations under six market scenarios including upward and mean reverting markets across several investment horizons. Owing to the multiple cash flows of DCA and SA, the annual internal rate of return is used to measure the DCA and SA returns. The results show that the mean return of DCA is slightly higher than the underlying return, while the SA is lower, particularly under short investment horizons. Both DCA and SA produce higher return volatility and riskiness than the underlying return. They also create negative skewness and excess kurtosis for the return distributions. For comparing their performances, we use the economic performance measure which can consider those high moments of distribution. Except for the mean reverting market, the underlying return is the best performer, while SA is the worst. This evidence becomes even clearer and convincing as the investment horizon increases. DCA can have lower riskiness and perform better only under the mean reverting market.

Keywords: Dollar-cost averaging; self-annuitization; economic index of riskiness; economic performance measure (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.worldscientific.com/doi/abs/10.1142/S2010495219500179
Access to full text is restricted to subscribers

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: https://EconPapers.repec.org/RePEc:wsi:afexxx:v:14:y:2019:i:04:n:s2010495219500179

Ordering information: This journal article can be ordered from

DOI: 10.1142/S2010495219500179

Access Statistics for this article

Annals of Financial Economics (AFE) is currently edited by Michael McAleer

More articles in Annals of Financial Economics (AFE) from World Scientific Publishing Co. Pte. Ltd.
Bibliographic data for series maintained by Tai Tone Lim ().