Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns
51 Pages Posted: 20 May 2017
Date Written: April 19, 2017
Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average.
Keywords: gradual portfolio adjustment, international portfolio allocation, predictable excess returns
JEL Classification: F30, F41, G11, G12
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