Dollar cost averaging and fair value dispersion

Abstract

AbstractThis study proposes a simple theoretical model to compare dollar cost averaging and buy‐and‐hold strategies for investors who perceive that equity's unobservable fair (intrinsic) value is symmetrically dispersed around the observable price. For reasonable model inputs, the study shows that if the fair value dispersion is relatively high, dollar cost averaging can be superior to a buy‐and‐hold strategy.