Costly Portfolio Adjustment

25 Pages Posted: 18 Aug 2009 Last revised: 21 Oct 2010

See all articles by Yosef Bonaparte

Yosef Bonaparte

University of Colorado at Denver - Department of Finance

Russell Cooper

University of Texas at Austin - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: August 2009

Abstract

This paper studies the dynamic optimization problem of a household when portfolio adjustment is costly. The analysis is motivated by the observation that on an annual basis, less than 71% of stockholders typically adjust their portfolio of common stocks. We use this, and related observations, to estimate the parameters of household preferences and portfolio adjustment costs. We find significant adjustment costs, beyond the direct costs of buying and selling assets. These adjustment costs and the consequent inactivity in portfolio adjustment imply that inferences drawn about household risk aversion and the elasticity of intertemporal substitution are biased: household risk aversion is lower compared to other estimates and it is not equal to the inverse of the elasticity of intertemporal substitution.

Suggested Citation

Bonaparte, Yosef and Cooper, Russell W., Costly Portfolio Adjustment (August 2009). NBER Working Paper No. w15227. Available at SSRN: https://ssrn.com/abstract=1454963

Yosef Bonaparte

University of Colorado at Denver - Department of Finance ( email )

United States

Russell W. Cooper (Contact Author)

University of Texas at Austin - Department of Economics ( email )

Austin, TX 78712
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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