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Dynamic Portfolio Adjustment and Capital Controls: A Euler Equation Approach

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  • D. Peter Broer
  • W. Jos Jansen

Abstract

We present a multiasset dynamic portfolio balance model that is based on the maximization of an intertemporal utility function in consumption when investors operate under uncertainty, quadratic adjustment costs, and capital market regulations. We estimate the model's structural parameters on quarterly portfolio data of the German private sector. Asset demand is insensitive to return changes, although the coefficients are significant. Adjustment costs are low but highly significant, giving rise to moderate lags of adjustment. Still, existing capital controls and adjustment costs cannot explain the currently observed “home bias” in the portfolio. Overall, our results imply a strong rejection of the portfolio model.

Suggested Citation

  • D. Peter Broer & W. Jos Jansen, 1998. "Dynamic Portfolio Adjustment and Capital Controls: A Euler Equation Approach," Southern Economic Journal, John Wiley & Sons, vol. 64(4), pages 902-921, April.
    • Handle: RePEc:wly:soecon:v:64:y:1998:i:4:p:902-921
    DOI: 10.1002/j.2325-8012.1998.tb00110.x
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