Portfolio inertia and the equity premium

Christopher Gust and David Lopez-Salido

No 984, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: We develop a DSGE model in which aggregate shocks induce endogenous movements in risk. The key feature of our model is that households rebalance their financial portfolio allocations infrequently, as they face a fixed cost of transferring cash across accounts. We show that the model can account for the mean returns on equity and the risk-free rate, and generates countercyclical movements in the equity premium that help explain the response of stock prices to monetary shocks. The model is consistent with empirical evidence documenting that unanticipated changes in monetary policy have important effects on equity prices through changes in risk.

Keywords: Portfolio management; Stock - Prices (search for similar items in EconPapers)
Date: 2009
New Economics Papers: this item is included in nep-bec, nep-cba and nep-dge
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:984

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