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On portfolio frictions, asset returns and volatility

Author

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  • Eyquem, Aurélien
  • Poilly, Céline
  • Belianska, Anna

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

  • Eyquem, Aurélien & Poilly, Céline & Belianska, Anna, 2023. "On portfolio frictions, asset returns and volatility," European Economic Review, Elsevier, vol. 160(C).
    • Handle: RePEc:eee:eecrev:v:160:y:2023:i:c:s0014292123002519
    DOI: 10.1016/j.euroecorev.2023.104623
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    More about this item

    Keywords

    Portfolio frictions; Financial accelerator; Uncertainty shocks;
    All these keywords.

    JEL classification:

    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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