Who gains and who loses on stock markets? Risk preferences and timing matter

Iryna Veryzhenko
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Iryna Veryzhenko: LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action - CNAM - Conservatoire National des Arts et Métiers [CNAM]

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Abstract: This paper uses an agent-based multi-asset model to examine the effect of risk preferences and optimal rebalancing frequency on performance measures while tracking profit and risk-adjusted return. We focus on the evolution of portfolios managed by heterogeneous mean-variance optimizers with a quadratic utility function under different market conditions. We show that patient and risk-averse agents are able to outperform aggressive risk-takers in the long-run. Our findings also suggest that the trading frequency determined by the optimal tolerance for the deviation from portfolio targets should be derived from a tradeoff between rebalancing benefits and rebalancing costs. In a relatively calm market, the absolute range of 6% to 8% and the complete-way back rebalancing technique outperforms others. During particular turbulent periods, however, none of the existing rebalancing techniques improves tax-adjusted profits and risk-adjusted returns simultaneously.

Keywords: agent-based modeling; mean-variance portfolio optimization; risk-aversion; tolerance bandrebalancing (search for similar items in EconPapers)
Date: 2021-04
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Published in Intelligent Systems in Accounting, Finance and Management, 2021, 28 (2), pp.143-155. ⟨10.1002/isaf.1493⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03605468

DOI: 10.1002/isaf.1493

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