Infrequent Random Portfolio Decisions in an Open Economy Model

Philippe Bacchetta, Eric van Wincoop and Eric Young
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Eric van Wincoop: University of Virginia - Department of Economics; National Bureau of Economic Research (NBER)

No 22-10, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We introduce a portfolio friction in a two-country DSGE model where investors face a constant probability to make new portfolio decisions. The friction leads to a more gradual portfolio adjustment to shocks and a weaker portfolio response to changes in expected excess returns. We apply the model to monthly data for the US and rest of the world for equity portfolios. We show that the model is consistent with a broad set of evidence related to portfolios, equity prices and excess returns for an intermediate level of the friction. The evidence includes portfolio inertia, limited sensitivity to expected excess returns, a significant impact of financial shocks, excess return predictability, and asset price momentum and reversal.

Keywords: portfolio frictions; infrequent portfolio decisions; international portfolio allocation; excess return predictability; financial shocks. (search for similar items in EconPapers)
JEL-codes: F30 F41 G11 G12 (search for similar items in EconPapers)
Pages: 45 pages
Date: 2022-01
New Economics Papers: this item is included in nep-dge and nep-opm
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Infrequent Random Portfolio Decisions in an Open Economy Model (2023)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp2210

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