Skew and Trend Aversion

Journal of Alternative Investments, Forthcoming

25 Pages Posted: 17 Jan 2019

See all articles by Zack Dugan

Zack Dugan

ISAM; Johns Hopkins University Institute of Data Intensive Engineering and Science

Alexander Greyserman

ISAM; Columbia University - Department of Mathematics

Date Written: January 14, 2019

Abstract

Despite evidence of the benefits to portfolio Sharpe ratio and variance, actual investor allocations to Trend Following strategies are typically 5% or less. Why is there such a significant discrepancy between the optimal allocation and actual allocation to Trend? We investigate known behavioral biases as a potential reason. While decision makers have other reasons to exclude Trend Following from their portfolios, in this paper, we explore loss aversion, recency bias, and the ambiguity effect as they pertain to Trend Following, and we call the combination of the three Trend Aversion. We quantify Trend Aversion and show that these biases are a viable explanation for suboptimal allocations to Trend. We demonstrate a direct connection between quantifications of known behavioral biases and current suboptimal allocations to Trend Following. Recognition of these relationships will help highlight the pitfalls of behavioral biases.

Keywords: behavioral biases, loss aversion, recency bias, skew, trend following, portfolio optimization

Suggested Citation

Dugan, Zack and Greyserman, Alexander, Skew and Trend Aversion (January 14, 2019). Journal of Alternative Investments, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3315719

Zack Dugan (Contact Author)

ISAM ( email )

5100 Town Center Circle
Suite 430
Boca Raton, FL 33686
United States

Johns Hopkins University Institute of Data Intensive Engineering and Science ( email )

3400 N. Charles St
Baltimore, MD 21218
United States

Alexander Greyserman

ISAM

5100 Town Center Circle
Suite 430
Boca Raton, FL 33686
United States

Columbia University - Department of Mathematics

United States

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