Journal of Financial Economics Vol. 135 No. 3 2020
Portfolio rebalancing in general equilibrium
Abstract
This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk-tolerant investors sell risky assets, while more risk-averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.
- DOI
- 10.1016/j.jfineco.2019.08.007
- Volume
- 135
- Issue
- 3
- Pages
- 816-834
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref