TY - JOUR
T1 - How Suboptimal are Linear Sharing Rules?
AU - Jensen, Bjarne Astrup
AU - Nielsen, Jørgen Aase
PY - 2016/5
Y1 - 2016/5
N2 - The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies two sources of suboptimal investment decisions as seen from each of the two investors individually. One is the suboptimal choice of portfolio, the other is the forced linear sharing rule. We measure the combined consequence for each investor by their respective loss in wealth equivalent. We show that significant losses can arise when investors are diverse in their risk attitude. We also show that an investor with a low degree of risk aversion, like the logarithmic or the square root investor, often applied in portfolio choice models, can either inflict or be subject to severe losses when being forced to participate in such a common investment pool.
AB - The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies two sources of suboptimal investment decisions as seen from each of the two investors individually. One is the suboptimal choice of portfolio, the other is the forced linear sharing rule. We measure the combined consequence for each investor by their respective loss in wealth equivalent. We show that significant losses can arise when investors are diverse in their risk attitude. We also show that an investor with a low degree of risk aversion, like the logarithmic or the square root investor, often applied in portfolio choice models, can either inflict or be subject to severe losses when being forced to participate in such a common investment pool.
KW - Constrained portfolio choice
KW - Pareto optimal sharing rules
KW - Suboptimal sharing rules
KW - Linear sharing rules
KW - Constrained portfolio choice
KW - Pareto optimal sharing rules
KW - Suboptimal sharing rules
KW - Linear sharing rules
UR - https://sfx-45cbs.hosted.exlibrisgroup.com/45cbs?url_ver=Z39.88-2004&url_ctx_fmt=info:ofi/fmt:kev:mtx:ctx&ctx_enc=info:ofi/enc:UTF-8&ctx_ver=Z39.88-2004&rfr_id=info:sid/sfxit.com:azlist&sfx.ignore_date_threshold=1&rft.object_id=1000000000017451&rft.object_portfolio_id=&svc.holdings=yes&svc.fulltext=yes
U2 - 10.1007/s10436-016-0279-3
DO - 10.1007/s10436-016-0279-3
M3 - Journal article
VL - 12
SP - 221
EP - 243
JO - Annals of Finance
JF - Annals of Finance
SN - 1614-2446
IS - 2
ER -