Efficiency of Cost-Averaging as an investment strategy - An analysis based on second order stochastic dominance

The long-lasting controversy on the usefulness of cost-averaging as an investment strategy is revived by the increasingly more aggressive marketing for long term saving plans with new intensity. Albrecht et al. (2002) illustrated using a shortfall risk based approach that cost-averaging may be an efficient strategy compared to simple buy-and-hold-strategies. The contribution of this paper is a detailed comparison of those investment strategies from the perspective of a general risk averse investor, given standard assumptions. Two theorems are derived to characterize the relevant second order stochastic dominance relations. It is proven that 1. that there are no stochastic dominance relations between cost-averaging and a purely risky buyand-hold strategy and 2. that there is no cost-averaging-strategy that dominates any given buy-and-hold-strategy combining a risky and risk free investment. In contrast, the converse of the second theorem does not hold.