Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns

Philippe Bacchetta and Eric van Wincoop

No 11983, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average.

Keywords: Gradual portfolio adjustment; International portfolio allocation; Predictable excess returns (search for similar items in EconPapers)
JEL-codes: F30 F41 G11 G12 (search for similar items in EconPapers)
Date: 2017-04
New Economics Papers: this item is included in nep-opm
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Citations: View citations in EconPapers (9)

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Related works:
Working Paper: Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns (2017)
Working Paper: Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns (2017)
Working Paper: Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns (2017)
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