Portfolio Inertia and Contaminations

Abstract:     
This paper analyzes investors' portfolio selection problems in a two-period dynamic model of Knightian uncertainty. We account for the existence of portfolio inertia in this two-period framework. Furthermore, by incorporating investors' updating behavior, we analyze how new observation in the first period will affect investors' behavior. By this analysis, we show that new observation in the first period will expand portfolio inertia in the second period compared with the case in which new observation has not been gained in the first period if the degree of Knightian uncertainty is sufficiently large.

Number of Pages in PDF File: 25

Keywords: ε-Contaminations, Knightian Uncertainty

JEL Classification: D81, G11

working papers series