Forward Discount Bias: Is It Near-Rationality in the Foreign Exchange Market?
AbstractA risk-averse U.S. investor adjusts the shares of a portfolio of short-term nominal domestic and foreign assets to maximize expected utility. The optimal strategy is to respond immediately to all new information that arrives weekly. The authors develop a model to estimate the cost of optimizing less frequently and find that it is generally very small. For example, if the investor adjusts portfolio shares every three months, an average expected utility loss of 0.16 percent per annum is incurred. Hence, slight opportunity costs of frequent optimization may outweight the benefits. This result may help explain forward discount bias. Copyright 1995 by The Economic Society of Australia.
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Bibliographic InfoArticle provided by The Economic Society of Australia in its journal The Economic Record.
Volume (Year): 71 (1995)
Issue (Month): 213 (June)
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- Menzies Gordon Douglas & Zizzo Daniel John, 2009.
The B.E. Journal of Macroeconomics,
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- Gordon Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," Research Paper Series 159, Quantitative Finance Research Centre, University of Technology, Sydney.
- Gordon D. Menzies & Daniel John Zizzo, 2005. "Inferential Expectations," CAMA Working Papers 2005-12, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
- Gordon Menzies & Daniel John Zizzo, 2004. "Inferential Expectations," Economics Series Working Papers 187, University of Oxford, Department of Economics.
- Malcolm Edey & John Romalis, 1996. "Issues in Modelling Monetary Policy," RBA Research Discussion Papers rdp9604, Reserve Bank of Australia.
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