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Portfolio rebalancing in general equilibrium

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  • Kimball, Miles S.
  • Shapiro, Matthew D.
  • Shumway, Tyler
  • Zhang, Jing

Abstract

This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk-tolerant investors sell risky assets, while more risk-averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.

Suggested Citation

  • Kimball, Miles S. & Shapiro, Matthew D. & Shumway, Tyler & Zhang, Jing, 2020. "Portfolio rebalancing in general equilibrium," Journal of Financial Economics, Elsevier, vol. 135(3), pages 816-834.
    • Handle: RePEc:eee:jfinec:v:135:y:2020:i:3:p:816-834
    DOI: 10.1016/j.jfineco.2019.08.007
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    More about this item

    Keywords

    Household finance; Portfolio choice; Heterogeneity in risk tolerance and age;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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