← Search

American Economic Review Vol. 102 No. 6 2012

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

YiLi Chien1; Harold L. Cole2; Hanno Lustig3

1 Federal Reserve Bank of St. Louis, PO Box 442, St. Louis, MO 63166. · 2 University of Pennsylvania, 3718 Locust Walk, Philadelphia, PA 19104. · 3 UCLA Anderson School of Management, 110 Westwood Plaza, Los Angeles, CA 90095.

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.

DOI
10.1257/aer.102.6.2859
Volume
102
Issue
6
Pages
2859-2896
Language
en
Sources
openalex bibtex:phds-export.bib crossref

Cite