Forward Discount Bias: Is It Near-Rationality in the Foreign Exchange Market?
A 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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Volume (Year): 71 (1995)
Issue (Month): 213 (June)
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