Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-balancing?

YiLi Chien, Harold Cole and Hanno Lustig

No 15382, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Our paper examines whether the well-documented failure of unsophisticated investors to rebalance their portfolios can help to explain the enormous counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which CRRA-utility investors have heterogeneous trading technologies. In our model, a large mass of investors do not re-balance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors adjust their portfolio each period to respond to changes in the investment opportunity set. We find that these intermittent re-balancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times.

JEL-codes: G12 (search for similar items in EconPapers)
Date: 2009-09
New Economics Papers: this item is included in nep-bec
Note: AP EFG
References: Add references at CitEc
Citations: View citations in EconPapers (5)

Published as YiLi Chien & Harold Cole & Hanno Lustig, 2012. "Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?," American Economic Review, American Economic Association, vol. 102(6), pages 2859-96, October.

Downloads: (external link)
http://www.nber.org/papers/w15382.pdf (application/pdf)

Related works:
Journal Article: Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing? (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:15382

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w15382

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by (wpc@nber.org).