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| Titel: |
Switching Investments Can Be a Bad Idea When Parrondo's Paradox Applies |
| Auteur: |
Spurgin, Richard Tamarkin, Maurry |
| Verschenen in: |
Journal of behavioral finance |
| Paginering: | Jaargang 6 (2005) nr. 1 pagina's 15-18 |
| Jaar: |
2005-03-01 |
| Inhoud: |
Many studies have indicated that a buy-and-hold investment strategy is superior to a trading strategy. This is thought to be true because trading incurs transaction costs that lower net returns compared to a buy-and-hold strategy. We propose a behavioral finance argument to illustrate that merely switching between positive expected return assets can lead to a long-run negative expected return, even when transaction costs are ignored. This counterintuitive result may obtain because of Parrondo's Paradox. We provide a stylized theoretical example that demonstrates how a trader can lose money by trading between assets with positive long-run expected returns. We also present simulation results to support our example. Thus, long-run negative results from trading may not be due entirely to transaction costs. A trading strategy may prove inferior to buy-and-hold for agents simply because of their singular trading patterns, as we outline in the paper. |
| Uitgever: |
Routledge |
| Bronbestand: |
Elektronische Wetenschappelijke Tijdschriften |
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