Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs

27 Pages Posted: 18 Apr 2011

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)

Guozhong Zhu

University of Alberta - Alberta School of Business

Date Written: April 2011

Abstract

This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.

Suggested Citation

Bonaparte, Yosef and Cooper, Russell W. and Zhu, Guozhong, Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs (April 2011). NBER Working Paper No. w16957. Available at SSRN: https://ssrn.com/abstract=1810311

Yosef Bonaparte (Contact Author)

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

United States

Russell W. Cooper

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

Guozhong Zhu

University of Alberta - Alberta School of Business ( email )

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