Costly Portfolio Adjustment

Yosef Bonaparte and Russell Cooper

No ECO2010/19, Economics Working Papers from European University Institute

Abstract: This paper studies the dynamic optimization problem of a household when portfolio adjustment is costly. The analysis is motivated by the observation that on a monthly basis, less than 10% of stockholders typically adjust their portfolio of common stocks. We use this, and related observations, to estimate the parameters of household preferences and portfolio adjustment costs. We find significant adjustment costs, beyond the direct costs of buying and selling assets. These adjustment costs imply that inferences drawn about household risk aversion and the elasticity of intertemporal substitution are biased: household risk aversion is lower compared to other estimates and it is not equal to the inverse of the elasticity of intertemporal substitution.

Keywords: http://cadmus.eui.eu/dspace/bitstream/1814/13794/1/ECO2010_19.pdf (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-dge
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Citations: View citations in EconPapers (4)

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