Does It Pay to Be Informed? Expenditure Efficiency in the US Mutual Fund Industry

The mutual fund industry would like us to believe that fund expenses are justifiable by their extensive management expertise, security analysis and the consequent delivery of returns that exceed the market performance. Management know-how is costly and thus it drives up the expenditure of actively managed mutual funds and potentially lowers their net returns. Nevertheless the fund managers argue that their contributions to the returns fully outweigh their costs and in general their trading strategies add value to the investors. On the other hand many academics hold that such claims are fundamentally misleading and actively managed funds cannot continuously outperform a market index. [excerpt

Bouchaud's model exhibits two different aging regimes in dimension one

Let E_i be a collection of i.i.d. exponential random variables. Bouchaud's model on Z is a Markov chain X(t) whose transition rates are given by w_{ij}=\nu \exp(-\beta ((1-a)E_i-aE_j)) if i, j are neighbors in Z. We study the behavior of two correlation functions: P[X(t_w+t)=X(t_w)] and P[X(t')=X(t_w) \forall t'\in[t_w,t_w+t]]. We prove the (sub)aging behavior of these functions when \beta >1 and a\in[0,1].Comment: Published at http://dx.doi.org/10.1214/105051605000000124 in the Annals of Applied Probability (http://www.imstat.org/aap/) by the Institute of Mathematical Statistics (http://www.imstat.org

Admissible strategies in semimartingale portfolio selection

The choice of admissible trading strategies in mathematical modelling of financial markets is a delicate issue, going back to Harrison and Kreps [HK79]. In the context of optimal portfolio selection with expected utility preferences this question has been the focus of considerable attention over the last twenty years. We propose a novel notion of admissibility that has many pleasant features - admissibility is characterized purely under the objective measure P; each admissible strategy can be approximated by simple strategies using finite number of trading dates; the wealth of any admissible strategy is a supermartingale under all pricing measures; local boundedness of the price process is not required; neither strict monotonicity, strict concavity nor differentiability of the utility function are necessary; the definition encompasses both the classical mean-variance preferences and the monotone expected utility. For utility functions finite on R, our class represents a minimal set containing simple strategies which also contains the optimizer, under conditions that are milder than the celebrated reasonable asymptotic elasticity condition on the utility function.utility maximization; non locally bounded semimartingale; incomplete market; sigma-localization and I-localization; sigma-martingale measure; Orlicz space; convex duality

Risk, Return and Portfolio Allocation under Alternative Pension Arrangements with Imperfect Financial Markets

This paper uses stochastic simulations on calibrated models to assess the steady state impact of different pension arrangements in an environment where financial markets are less than perfect. Surprisingly little is known about the optimal split between funded and unfunded systems when there are sources of uninsurable risk that are allocated in different ways by different types of pension system and where there are imperfections in financial markets (eg transactions costs or adverse selection) . This paper calculates the expected welfare of agents in different economies where in the steady state the importance of unfunded, state pensions differs. We estimate how the optimal level of unfunded, state pensions depends on rate of return and income risks and also upon the actuarial fairness of annuity contracts. We focus on the case of Japan where aging is rapid and unfunded pensions are currently generous.Pensions; portfolio allocation, demographics; annuities; risk-sharing