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  4. October 2012
  5. Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?

Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?

  • YiLi Chien
  • Harold Cole
  • Hanno Lustig
American Economic Review
vol. 102, no. 6, October 2012
(pp. 2859-96)
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Abstract

Our paper examines whether the failure of unsophisticated investors to rebalance their portfolios can help to explain the countercyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which a large mass of investors do not rebalance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors do. We find that intermittent rebalancers 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 D14, E32, G11, G12)

Citation

Chien, YiLi, Harold Cole, and Hanno Lustig. 2012. "Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?" American Economic Review, 102 (6): 2859-96. DOI: 10.1257/aer.102.6.2859

Additional Materials

JEL Classification

  • D14 Personal Finance
  • E32 Business Fluctuations; Cycles
  • G11 Portfolio Choice; Investment Decisions
  • G12 Asset Pricing; Trading volume; Bond Interest Rates