Portfolio rebalancing and asset pricing with heterogeneous inattention

Omar Rachedi

No 1633, Working Papers from Banco de España

Abstract: Can households’ inattention to the stock market quantitatively account for the inertia in portfolio rebalancing? I address this question by introducing an observation cost into a production economy with heterogeneous agents. In this environment inattention changes endogenously over time and across agents. I find that inattention explains the inertia in portfolio rebalancing and its heterogeneity across households. Inattention also rationalises the limited stock market participation observed in the data, and improves the asset pricing performance of the model. Finally, I present a novel testable implication linking the effects of inattention on portfolio choices and asset prices to households’ funding liquidity.

Keywords: observation cost; limited stock market participation; equity premium (search for similar items in EconPapers)
JEL-codes: G11 G12 (search for similar items in EconPapers)
Pages: 66 pages
Date: 2016-12
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://www.bde.es/f/webbde/SES/Secciones/Publicaci ... /16/Fich/dt1633e.pdf First version, December 2016 (application/pdf)

Related works:
Journal Article: PORTFOLIO REBALANCING AND ASSET PRICING WITH HETEROGENEOUS INATTENTION (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:bde:wpaper:1633

Access Statistics for this paper

More papers in Working Papers from Banco de España Contact information at EDIRC.
Bibliographic data for series maintained by Ángel Rodríguez. Electronic Dissemination of Information Unit. Research Department. Banco de España ().