Costly Portfolio Adjustment

Yosef Bonaparte and Russell Cooper

No 15227, NBER Working Papers from National Bureau of Economic Research, Inc

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 an annual basis, less than 71% 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 and the consequent inactivity in portfolio adjustment 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.

JEL-codes: E21 E44 G11 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-dge and nep-mac
Note: EFG AP
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Citations: View citations in EconPapers (24)

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Working Paper: Costly Portfolio Adjustment (2010)
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