On the error from compounding with the arithmetic mean interest rate

Abraham Mehrez, Ahron Rosenfeld

Research output: Contribution to journalArticlepeer-review

Abstract

The error that arises when one uses an arithmetic mean rather than a geometric mean for computing future values is examined. The error is evaluated both in the case where interest rates are known and in the case where interest rates are random. The analysis contains comparative statistics with respect to the number of compounding periods and the arithmetic mean of the series of interest rates. An illustrative example is provided.
Original languageEnglish
Pages (from-to)283-291
Number of pages9
JournalEngineering Economist
Volume41
Issue number3
DOIs
StatePublished - 1996

ASJC Scopus subject areas

  • Education
  • Economics and Econometrics
  • General Engineering

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