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Portfolio Rebalancing in General Equilibrium

39 Pages Posted: 22 Jul 2011  

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics; University of Colorado Boulder; Center for Economic and Social Research, USC; National Bureau of Economic Research (NBER)

Matthew D. Shapiro

University of Michigan at Ann Arbor - Department of Economics; National Bureau of Economic Research (NBER)

Tyler Shumway

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business

Jing Zhang

University of Michigan at Ann Arbor

Date Written: July 7, 2011

Abstract

Standard portfolio advice is that agents should hold a constant share of risky assets. All agents cannot, however, follow this advice because supply and demand of risky assets must be equal. To study equilibrium rebalancing, the paper develops an overlapping generations model in which agents differ both in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that affects levered and unlevered agents in opposite directions, an aggregate risk tolerance effect which depends on the distribution of wealth, and an intertemporal hedging effect. Optimal equilibrium portfolio rebalancing departs significantly from the standard advice.

Keywords: rebalancing, portfolio theory, overlapping generations

JEL Classification: G11

Suggested Citation

Kimball, Miles S. and Shapiro, Matthew D. and Shumway, Tyler and Zhang, Jing, Portfolio Rebalancing in General Equilibrium (July 7, 2011). Available at SSRN: https://ssrn.com/abstract=1892298 or http://dx.doi.org/10.2139/ssrn.1892298

Miles S. Kimball

University of Michigan at Ann Arbor - Department of Economics ( email )

611 Tappan Street
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University of Colorado Boulder ( email )

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HOME PAGE: http://www.colorado.edu/Economics/people/faculty/kimball.html

Center for Economic and Social Research, USC ( email )

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National Bureau of Economic Research (NBER)

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Matthew D. Shapiro

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
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313-764-5419 (Phone)
313-764-2769 (Fax)

University of Michigan at Ann Arbor - Department of Economics ( email )

and Survey Research Center
611 Tappan Street
Ann Arbor, MI 48109-1220
United States
313-764-5419 (Phone)
313-764-2769 (Fax)

Tyler Shumway (Contact Author)

University of Michigan at Ann Arbor, The Stephen M. Ross School of Business ( email )

701 Tappan Street
Ann Arbor, MI MI 48109
United States
734-763-4129 (Phone)
734-936-0274 (Fax)

HOME PAGE: http://www.umich.edu/~shumway

Jing Zhang

University of Michigan at Ann Arbor ( email )

500 S. State Street
Ann Arbor, MI 48109
United States

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