Risk aversion, noise, and optimal investments

Hjördis Hardardottir, Frederik Lundtofte

Research output: Contribution to journalJournal articleResearchpeer-review


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.

Original languageEnglish
JournalJournal of Portfolio Management
Issue number3
Pages (from-to)51-59
Number of pages9
Publication statusPublished - 1 Mar 2017
Externally publishedYes


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