Portfolio rebalancing in general equilibrium

Miles Kimball, Matthew Shapiro, Tyler Shumway and Jing Zhang

Journal of Financial Economics, 2020, vol. 135, issue 3, 816-834

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.

Keywords: Household finance; Portfolio choice; Heterogeneity in risk tolerance and age (search for similar items in EconPapers)
JEL-codes: E21 E44 G11 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0304405X19301989
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Portfolio Rebalancing in General Equilibrium (2018)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:135:y:2020:i:3:p:816-834

DOI: 10.1016/j.jfineco.2019.08.007

Access Statistics for this article

Journal of Financial Economics is currently edited by G. William Schwert

More articles in Journal of Financial Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().