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The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models

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  • Emmanouil Platanakis
  • Athanasios Sakkas
  • Charles Sutcliffe

Abstract

Estimation of the inputs is the main problem when applying portfolio analysis, and Markov regime-switching models have been shown to improve these estimates. We investigate whether the use of two-regime models remains superior across a range of values of risk aversion and transaction costs, in the presence of skewness and kurtosis and no short sales. Our results for US data suggest that, due to differences in their risk preferences and transactions costs, most retail investors may prefer to use one-regime models, while investment banks may prefer to use two-regime models.

Suggested Citation

  • Emmanouil Platanakis & Athanasios Sakkas & Charles Sutcliffe, 2019. "The role of transaction costs and risk aversion when selecting between one and two regimes for portfolio models," Applied Economics Letters, Taylor & Francis Journals, vol. 26(6), pages 516-521, March.
    • Handle: RePEc:taf:apeclt:v:26:y:2019:i:6:p:516-521
    DOI: 10.1080/13504851.2018.1486984
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    Cited by:

    1. Constandina Koki & Stefanos Leonardos & Georgios Piliouras, 2020. "Exploring the Predictability of Cryptocurrencies via Bayesian Hidden Markov Models," Papers 2011.03741, arXiv.org, revised Dec 2020.
    2. Newton, David & Platanakis, Emmanouil & Stafylas, Dimitrios & Sutcliffe, Charles & Ye, Xiaoxia, 2021. "Hedge fund strategies, performance &diversification: A portfolio theory & stochastic discount factor approach," The British Accounting Review, Elsevier, vol. 53(5).
    3. Koki, Constandina & Leonardos, Stefanos & Piliouras, Georgios, 2022. "Exploring the predictability of cryptocurrencies via Bayesian hidden Markov models," Research in International Business and Finance, Elsevier, vol. 59(C).

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