Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs

Yosef Bonaparte, Russell Cooper and Guozhong Zhu

No 16957, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.

JEL-codes: E21 G11 (search for similar items in EconPapers)
Date: 2011-04
New Economics Papers: this item is included in nep-dge, nep-ias and nep-mac
Note: EFG
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Published as Bonaparte, Yosef & Cooper, Russell & Zhu, Guozhong, 2012. "Consumption smoothing and portfolio rebalancing: The effects of adjustment costs," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 751-768.

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Journal Article: Consumption smoothing and portfolio rebalancing: The effects of adjustment costs (2012)
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