Fight or Flight? Portfolio Rebalancing by Individual Investors

45 Pages Posted: 21 Mar 2007

See all articles by Laurent E. Calvet

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance; CEPR

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Paolo Sodini

Stockholm School of Economics - Department of Finance; Swedish House of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: March 2007

Abstract

This paper investigates the dynamics of individual portfolios in a unique dataset containing the disaggregated wealth and income of all households in Sweden. Between 1999 and 2002, stockmarket participation slightly increased but the average share of risky assets in the financial portfolio of participants fell moderately, implying little aggregate rebalancing in response to the decline in risky asset prices during this period. We show that these aggregate results conceal strong household-level evidence of active rebalancing, which on average offsets about one half of idiosyncratic passive variations in the risky asset share. Sophisticated households with greater education, wealth, and income, and holding better diversified portfolios, tend to rebalance more aggressively. We also study the decisions to enter and exit risky financial markets. More sophisticated households are more likely to enter, and less likely to exit. Portfolio characteristics and performance also influence exit decisions. Households with poorly diversified portfolios and poor returns on their mutual funds are more likely to exit; however, consistent with the literature on the disposition effect, households with poor returns on their directly held stocks are less likely to exit.

Keywords: Asset allocation, disposition effect, diversification, participation, portfolio rebalancing

JEL Classification: D5, D9, E3, O1

Suggested Citation

Calvet, Laurent E. and Campbell, John Y. and Sodini, Paolo, Fight or Flight? Portfolio Rebalancing by Individual Investors (March 2007). AFA 2008 New Orleans Meetings Paper, Available at SSRN: https://ssrn.com/abstract=971062 or http://dx.doi.org/10.2139/ssrn.971062

Laurent E. Calvet

EDHEC Business School - Department of Economics & Finance ( email )

France

CEPR ( email )

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John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

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HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

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Paolo Sodini

Stockholm School of Economics - Department of Finance ( email )

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Sweden
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46 8 312327 (Fax)

HOME PAGE: http://www.hhs.se/secfi/People/Faculty/Finpso/finp

Swedish House of Finance ( email )

Drottninggatan 98
111 60 Stockholm
Sweden

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