Optimal asset allocation based on utility maximization in the presence of market frictions

Alessandro Bucciol and Raffaele Miniaci

No 12, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: We develop a model of optimal asset allocation based on a utility framework. This applies to a more general context than the classical mean-variance paradigm since it can also account for the presence of constraints in the portfolio composition. Using this approach, we study the distribution of a measure of wealth compensative variation, we propose a benchmark and portfolio efficiency test and a procedure to estimate the implicit risk aversion parameter of a power utility function. Our empirical analysis makes use of the S&P 500 and industry portfolios time series to show that although the market index cannot be considered an efficient investment in the mean-variance metric, the wealth loss associated with such an investment is statistically different from zero but rather small (lower than 0.5%). The wealth loss is at its minimum for a representative agent with a constant risk aversion index not higher than 5. Furthermore we show that, for reasonable levels of risk aversion, the use of an equally weighted portfolio is surprisingly consistent with an expected utility maximizing behavior.

JEL-codes: C15 D14 G11 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2006-03
New Economics Papers: this item is included in nep-fin, nep-fmk and nep-upt
References: Add references at CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
https://economia.unipd.it/sites/economia.unipd.it/files/20060012.pdf (application/pdf)

Related works:
Working Paper: Optimal Asset Allocation Based on Utility Maximization in the Presence of Market Frictions (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0012

Access Statistics for this paper

More papers in "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno" Contact information at EDIRC.
Bibliographic data for series maintained by Raffaele Dei Campielisi ().