Uncertainty aversion and portfolio inertia

Research output: Contribution to journalArticle

1 Citation (Scopus)

Abstract

In stock markets, we often observeportfolio inertia, i.e., a situation in which some stocks are not traded or not priced for a few minutes or longer. This is neither an exceptional situation in which some stock price soars too high to be priced, nor the one where some stock price plummets too much to be traded. By introducing the concept of 'Knightian uncertainty', Dow and Werlang (1992) account for the existence of portfolio inertia, which has not been accounted for under the concept of 'risk'. This paper provides a characterization of the spread between buying and selling prices based on a parameter proposed by Ozaki and Streufert (1999, 2001) that enables us to estimate the attitude towards Knightian uncertainty, and shows that an increase (a decrease) in Knightian uncertainty expands (shrinks) the interval in which an investor never changes her initial position. Furthermore, we analyse the effect of an increase in Knightian uncertainty on portfolio inertia based onEpsilon-contaminations.

Original languageEnglish
Pages (from-to)334-343
Number of pages10
JournalBulletin of Economic Research
Volume64
Issue number3
DOIs
Publication statusPublished - Jul 1 2012

Keywords

  • Epsilon-contaminations
  • Portfolio inertia
  • Uncertainty

ASJC Scopus subject areas

  • Economics and Econometrics

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