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On Portfolio Frictions, Asset Returns and Volatility

Author

Listed:
  • Aurélien Eyquem

    (UNIL - Université de Lausanne = University of Lausanne)

  • Céline Poilly

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

  • Anna Belianska

    (AMSE - Aix-Marseille Sciences Economiques - EHESS - École des hautes études en sciences sociales - AMU - Aix Marseille Université - ECM - École Centrale de Marseille - CNRS - Centre National de la Recherche Scientifique)

Abstract

We rationalize the observed short-run differences in corporate and long-term government bond yields in an financial-accelerator model with frictions that restrict changes in portfolio shares. We estimate the model on quarterly data for the Euro Area from 1999 to 2019, and show that the portfolio friction parameter is positive and significant. Portfolio frictions not only generate a time-varying wedge between the two returns that fits the data, but also raise the volatility of return differentials, and the precautionary motive of savers. As a result, the macroeconomic effects of uncertainty shocks are amplified by portfolio frictions.

Suggested Citation

  • Aurélien Eyquem & Céline Poilly & Anna Belianska, 2023. "On Portfolio Frictions, Asset Returns and Volatility ," Post-Print hal-04525007, HAL.
    • Handle: RePEc:hal:journl:hal-04525007
    DOI: 10.1016/j.euroecorev.2023.104623
    Note: View the original document on HAL open archive server: https://amu.hal.science/hal-04525007
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