Min-Regret Methods in Portfolio Transition
5 Pages Posted: 25 Jul 2017
Date Written: July 21, 2017
Investors often regret their trades. Regret can significantly impact their strategic decisions, for example, by making them abandon a pre-planned investment strategy during stressed market conditions. Therefore, minimizing expected regret is a prudent way to construct investment strategies. We propose to measure the cost of regret as a price of regret protection option, and apply this new metric to portfolio transition strategies, where the objective is to increase (or decrease) risky exposures over a specified period of time. Regret-averse investors should design their portfolio transition with low cost of regret.
Keywords: portfolio management, trading, min-regret methods
JEL Classification: C02
Suggested Citation: Suggested Citation