Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?
AbstractOur paper examines whether the failure of unsophisticated investors to rebalance their portfolios can help to explain the countercyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which a large mass of investors do not rebalance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors do. We find that intermittent rebalancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times. (JEL D14, E32, G11, G12)
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 102 (2012)
Issue (Month): 6 (October)
Other versions of this item:
- Yi-Li Chien & Harold L. Cole & Hanno Lustig, 2009. "Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-balancing?," NBER Working Papers 15382, National Bureau of Economic Research, Inc.
- G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
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- Carlos Carvalho & Felipe Schwartzman, 2012.
"Selection and monetary non-neutrality in time-dependent pricing models,"
12-09, Federal Reserve Bank of Richmond.
- Felipe Schwartzman & Carlos Carvalho, 2012. "Selection and Monetary Non-Neutrality in Time-Dependent Pricing Models," 2012 Meeting Papers 987, Society for Economic Dynamics.
- Edison G. Yu, 2013. "Dynamic market participation and endogenous information aggregation," Working Papers 13-42, Federal Reserve Bank of Philadelphia.
- Gao, Xiaodan & Hnatkovska, Viktoria & Marmer, Vadim, 2012. "Limited Participation in International Business Cycle Models: A Formal Evaluation," Microeconomics.ca working papers vadim_marmer-2012-1, Vancouver School of Economics, revised 21 Dec 2013.
- Elías Albagli, 2013. "Investment Horizons and Asset Prices under Asymmetric Information," Working Papers Central Bank of Chile 709, Central Bank of Chile.
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