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Risk aversion, noise, and optimal investments

Hardardottir, Hjördis LU and Lundtofte, Frederik LU (2017) In Journal of Portfolio Management 43(3). p.51-59
Abstract

In contrast to the efficient market hypothesis (EMH), the noisy market hypothesis (NMH) asserts that prices are but noisy indications of fundamental values. The authors study losses in certainty equivalents of investing according to one hypothesis (NMH or EMH) when the other is true. Their findings suggest that, for reasonable parameter values, investing according to the EMH when the NMH is true yields lower losses than investing according to the NMH when the EMH is true. Further, investing according to the right hypothesis is much more important for risk-tolerant investors than for risk-averse investors.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
in
Journal of Portfolio Management
volume
43
issue
3
pages
9 pages
publisher
Institutional Investor Journals Group
external identifiers
  • scopus:85018760749
ISSN
0095-4918
DOI
10.3905/jpm.2017.43.3.051
language
English
LU publication?
yes
id
5209ec08-9cf9-4f30-96cf-38e3d95e9a57
date added to LUP
2017-05-24 11:52:21
date last changed
2018-01-07 12:05:07
@article{5209ec08-9cf9-4f30-96cf-38e3d95e9a57,
  abstract     = {<p>In contrast to the efficient market hypothesis (EMH), the noisy market hypothesis (NMH) asserts that prices are but noisy indications of fundamental values. The authors study losses in certainty equivalents of investing according to one hypothesis (NMH or EMH) when the other is true. Their findings suggest that, for reasonable parameter values, investing according to the EMH when the NMH is true yields lower losses than investing according to the NMH when the EMH is true. Further, investing according to the right hypothesis is much more important for risk-tolerant investors than for risk-averse investors.</p>},
  author       = {Hardardottir, Hjördis and Lundtofte, Frederik},
  issn         = {0095-4918},
  language     = {eng},
  month        = {03},
  number       = {3},
  pages        = {51--59},
  publisher    = {Institutional Investor Journals Group},
  series       = {Journal of Portfolio Management},
  title        = {Risk aversion, noise, and optimal investments},
  url          = {http://dx.doi.org/10.3905/jpm.2017.43.3.051},
  volume       = {43},
  year         = {2017},
}