The seminal academic criticism of dollar cost averaging on many specifications of economic conditions is A Note on the Suboptimality of Dollar-Cost Averaging as an Investment Policy (Constantinides (1979)). You might also be interested in these papers:
Dollar Cost Averaging is an investment system that is widely advocated
by brokerage firms and mutual funds. In its best known form, an
investor seeking to put a lump sum into risky assets is counseled to
invest the money over a period of time in equal installments in order
to avoid the devastating effect of a market fall immediately after a
single, lump-sum investment. Using graphical analysis, historical
stock market returns, and Monte Carlo simulations, this article
demonstrates that no such benefit accrues to a Dollar Cost Averaging
Strategy. Two alternative strategies, optimal rebalancing and buy and
hold achieve better performance in all three analyses.
Nobody gains from dollar cost averaging analytical, numerical and empirical results (Knight and Mandell (1993))
Some studies find the dollar-cost averaging investment strategy to be
sub-optimal using a traditional Sharpe ratio performance ranking
metric. Using both the Sortino ratio and the Upside Potential ratio,
we empirically test four investment strategies for alternative asset
investments. We find the relative ranking of dollar-cost averaging
remains inferior to alternative investment strategies. (JEL G1, G11,
An empirical examination of the effectiveness of dollar-cost averaging using downside risk performance measures (Leggio and Lien (2003))
The widespread practice of dollar-cost averaging (DCA) amongst the
investing public, has puzzled most financial economists, ever since
Constantinides demonstrated the dynamic inefficiency of this
strategy under very general conditions. This enduring phenomena has
forced researchers, such as Statman , to suggest behavioral
explanations for DCA's popularity, predicated on the prospect theory
of Kahneman and Tversky .
In this paper we reexamine the payoff structure of DCA via
continuous-time financial mathematics and then ask the question: Is it
possible to reconcile the theory and practice of dollar-cost
To answer this question, we take a slightly different approach to the
issue by using the tools of stochastic calculus and Brownian bridges.
We demonstrate that engaging in a dollar-cost averaging strategy is
akin to purchasing a zero strike arithmetic Asian option on the
underlying security. In other words, people who engage in dollar-cost
averaging are implicitly purchasing a path-dependent contingent claim.
We then prove that the expected return from this exotic option — i.e.
the DCA strategy — conditional on knowing the final value of the
security will uniformly exceed the return from the underlying security
for all sufficiently large volatilities.
This leads us to argue that investors may be dollar-cost averaging
because they have "target prices" for the underlying asset price. The
strategy of dollar-cost averaging would then exceed the returns from
lump-sum investing, based on their subjective conditional expectation.
In fact, the more volatile the underlying security, the greater is the
benefit to dollar-cost averaging — conditional on knowing the final
value — which is consistent with common practice.
A CONTINUOUS-TIME REEXAMINATION OF DOLLAR-COST AVERAGING (MILEVSKY and POSNER (2003))
Dollar Cost Averaging is a strategy for purchasing equity securities
that is widely recommended by professional investment advisors and
commentators, but which has been virtually ignored by academic
theorists and textbook writers. In this paper we explore whether the
strategy is but another instance of irrational behavior by individual
investors, or whether it is an investment heuristic that has survival
value in an environment in which security prices exhibit mean
reversion behavior that has only belatedly been recognized by academic
theorists. Our evidence supports the view that the uninformed
individual investors who follow this strategy in purchasing individual
stocks to add to an existing portfolio are better off than if they
followed the ‘rational’ strategies traditionally recommended by
Dollar Cost Averaging (Brennan, Li and Torous (2005))