UNCERTAINTY AVERSION AND PORTFOLIO INERTIA
Article first published online: 29 JAN 2011
© 2011 The Author. Bulletin of Economic Research © 2011 Blackwell Publishing Ltd and the Board of Trustees of the Bulletin of Economic Research.
Bulletin of Economic Research
Volume 64, Issue 3, pages 334–343, July 2012
How to Cite
Asano, T. (2012), UNCERTAINTY AVERSION AND PORTFOLIO INERTIA. Bulletin of Economic Research, 64: 334–343. doi: 10.1111/j.1467-8586.2010.00366.x
- Issue published online: 3 JUL 2012
- Article first published online: 29 JAN 2011
- portfolio inertia;
In stock markets, we often observe portfolio 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 on Epsilon-contaminations.