How Suboptimal are Linear Sharing Rules?

Bjarne Astrup  Jensen; Jørgen Aase Nielsen

doi:10.1007/s10436-016-0279-3

How Suboptimal are Linear Sharing Rules?

Bjarne Astrup Jensen, Jørgen Aase Nielsen

Department of Finance

Research output: Contribution to journal › Journal article › Research › peer-review

201 Downloads (Pure)

Abstract

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.

Original language	English
Journal	Annals of Finance
Volume	12
Issue number	2
Pages (from-to)	221–243
Number of pages	23
ISSN	1614-2446
DOIs	https://doi.org/10.1007/s10436-016-0279-3
Publication status	Published - May 2016

Keywords

Constrained portfolio choice
Pareto optimal sharing rules
Suboptimal sharing rules
Linear sharing rules

Cite this

Jensen, B. A., & Nielsen, J. A. (2016). How Suboptimal are Linear Sharing Rules? Annals of Finance, 12(2), 221–243. https://doi.org/10.1007/s10436-016-0279-3

Jensen, Bjarne Astrup ; Nielsen, Jørgen Aase. / How Suboptimal are Linear Sharing Rules?. In: Annals of Finance. 2016 ; Vol. 12, No. 2. pp. 221–243.

@article{5d5e5d49978d4e5c95b138beda842406,

title = "How Suboptimal are Linear Sharing Rules?",

abstract = "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.",

keywords = "Constrained portfolio choice, Pareto optimal sharing rules, Suboptimal sharing rules, Linear sharing rules, Constrained portfolio choice, Pareto optimal sharing rules, Suboptimal sharing rules, Linear sharing rules",

author = "Jensen, {Bjarne Astrup} and Nielsen, {J{\o}rgen Aase}",

year = "2016",

month = "5",

doi = "10.1007/s10436-016-0279-3",

language = "English",

volume = "12",

pages = "221–243",

journal = "Annals of Finance",

issn = "1614-2446",

publisher = "Springer",

number = "2",

}

Jensen, BA & Nielsen, JA 2016, 'How Suboptimal are Linear Sharing Rules?', Annals of Finance, vol. 12, no. 2, pp. 221–243. https://doi.org/10.1007/s10436-016-0279-3

How Suboptimal are Linear Sharing Rules? / Jensen, Bjarne Astrup ; Nielsen, Jørgen Aase.

In: Annals of Finance, Vol. 12, No. 2, 05.2016, p. 221–243.

Research output: Contribution to journal › Journal article › Research › peer-review