Portfolio Rebalancing in General Equilibrium

80 Pages Posted: 18 Jun 2018

See all articles by Miles S. Kimball

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

Multiple version iconThere are 2 versions of this paper

Date Written: June 2018

Abstract

This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.

Suggested Citation

Kimball, Miles S. and Shapiro, Matthew D. and Shumway, Tyler and Zhang, Jing, Portfolio Rebalancing in General Equilibrium (June 2018). NBER Working Paper No. w24722. Available at SSRN: https://ssrn.com/abstract=3198024

Miles S. Kimball (Contact Author)

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

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Matthew D. Shapiro

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and Survey Research Center
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National Bureau of Economic Research (NBER) ( email )

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Tyler Shumway

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

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

Jing Zhang

University of Michigan at Ann Arbor ( email )

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Ann Arbor, MI 48109
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