Abstract

http://ssrn.com/abstract=1629189
 
 

References (29)



 
 

Citations (1)



 


 



Jensen's Inequality, Parameter Uncertainty, and Multi-Period Investment


Mark Grinblatt


University of California, Los Angeles (UCLA) - Finance Area; Yale University - International Center for Finance; National Bureau of Economic Research (NBER)

Juhani T. Linnainmaa


University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

October 30, 2010

Chicago Booth Research Paper No. 10-22
CRSP Working Paper

Abstract:     
Classical approaches to estimation and decisions requiring estimation often are at odds. When values critical to the decision are convex or concave functions of unknown parameters, the statistician’s estimation error adjustments are the opposite of what is appropriate for the decision. We illustrate the conflict by studying multi-period investment problems. The proper application of Jensen’s inequality to the decision turns finance intuition on its head. For example, multi-period investments with negative risk premia can be profitable, there can be infinite demand for risky securities by risk averse investors, settings exist where risk averse investors should not diversify, and demand for mutual funds with negative alphas may be rational.

Number of Pages in PDF File: 48

Keywords: Bayesian, Multi-period Investment, Nonlinear Estimation

JEL Classification: C11, G11

working papers series





Download This Paper

Date posted: June 23, 2010 ; Last revised: November 2, 2010

Suggested Citation

Grinblatt, Mark and Linnainmaa, Juhani T., Jensen's Inequality, Parameter Uncertainty, and Multi-Period Investment (October 30, 2010). Chicago Booth Research Paper No. 10-22; CRSP Working Paper. Available at SSRN: http://ssrn.com/abstract=1629189 or http://dx.doi.org/10.2139/ssrn.1629189

Contact Information

Mark Grinblatt
University of California, Los Angeles (UCLA) - Finance Area ( email )
Los Angeles, CA 90095-1481
United States
310-825-1098 (Phone)
310-206-5455 (Fax)
Yale University - International Center for Finance
Box 208200
New Haven, CT 06520-8200
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Juhani T. Linnainmaa (Contact Author)
University of Chicago - Booth School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
(773) 834-3176 (Phone)
(773) 753-1052 (Fax)
HOME PAGE: http://faculty.chicagobooth.edu/juhani.linnainmaa
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Feedback to SSRN


Paper statistics
Abstract Views: 2,879
Downloads: 550
Download Rank: 27,886
References:  29
Citations:  1

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo1 in 0.469 seconds