Portfolio Rebalancing in General Equilibrium

Miles Kimball, Matthew Shapiro, Tyler Shumway and Jing Zhang

No 24722, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: D53 E44 G11 (search for similar items in EconPapers)
Date: 2018-06
New Economics Papers: this item is included in nep-dge and nep-mac
Note: AP EFG ME
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Published as Miles S. Kimball & Matthew D. Shapiro & Tyler Shumway & Jing Zhang, 2019. "Portfolio Rebalancing in General Equilibrium," Journal of Financial Economics, .

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Journal Article: Portfolio rebalancing in general equilibrium (2020)
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