Estimating the Intensity of Choice in a Dynamic Mutual Fund Allocation Decision

Elsevier B.V.
Publication Type:
Journal Article
Journal of Economic Dynamics and Control, 2008, 32 (12), pp. 3866 - 3876
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The paper analyzes the intensity of choice in an agent based financial optimization problem. Mean-variance optimizing agents choose among mutual funds of similar styles but varying performance. We specify a model for the allocation of new funds, switching between funds, and withdrawals and obtain statistically significant estimates of the intensity of choice parameter. This estimate is also given economic interpretation through the underperformance of funds that use an active style. We find that agents with relative risk aversion of 2 will move 1% of their funds from active to passive for an extra 34 basis points of return.
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