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Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision
David Goldbaum University of Technology Sydney Bruce Mizrach Rutgers University, New Brunswick/Piscataway, Faculty of Arts and Sciences-New Brunswick/Piscataway, Department of Economics February 12, 2008 Abstract: The paper analyzes the intensity of choice in an agent based financial optimization problem. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. We specify a model for the allocation of new funds, switching between funds, and withdrawals and obtain statistically significant estimates of the intensity of choice parameter. This estimate is also given economic interpretation through the underperformance of funds that use an active style. We find that agents with relative risk aversion of 2 will move 1% of their funds from active to passive for an extra 34 basis points of return.
Keywords: heterogenous agents, intensity of choice, mutual funds JEL Classifications: G11 Working Paper SeriesDate posted: June 13, 2006 ; Last revised: April 10, 2008Suggested CitationContact Information
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