Abstract

http://ssrn.com/abstract=1473520
 
 

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Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Re-Balancing?


YiLi Chien


Federal Reserve Bank of St. Louis

Harold L. Cole


University of Pennsylvania - Department of Economics; National Bureau of Economic Research (NBER)

Hanno N. Lustig


UCLA - Anderson School of Management; National Bureau of Economic Research (NBER)

April 30, 2010


Abstract:     
Our paper examines whether the well-documented failure of unsophisticated investors to rebalance their portfolios can help to explain the enormous counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which CRRA-utility investors have heterogeneous trading technologies. In our model, a large mass of investors do not re-balance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors adjust their portfolio each period to respond to changes in the investment opportunity set. We find that these intermittent re-balancers 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.

Number of Pages in PDF File: 53

Keywords: Asset Pricing, Household Finance, Risk Sharing, Limited Participation

JEL Classification: G12

working papers series





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Date posted: September 16, 2009 ; Last revised: September 1, 2011

Suggested Citation

Chien, YiLi and Cole, Harold L. and Lustig, Hanno N., Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Re-Balancing? (April 30, 2010). Available at SSRN: http://ssrn.com/abstract=1473520 or http://dx.doi.org/10.2139/ssrn.1473520

Contact Information

YiLi Chien
Federal Reserve Bank of St. Louis ( email )
P.O. Box 442
ST LOUIS, MO 63166
United States
314-444-4617 (Phone)
Harold L. Cole
University of Pennsylvania - Department of Economics ( email )
3718 Locust Walk
436 McNeil
Philadelphia, PA 19104
United States
215-898-7788 (Phone)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Hanno N. Lustig (Contact Author)
UCLA - Anderson School of Management ( email )
405 Hilgard Avenue
Box 951361
Los Angeles, CA 90095
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
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