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PORTFOLIO REBALANCING AND ASSET PRICING WITH HETEROGENEOUS INATTENTION
Author(s) -
Rachedi Omar
Publication year - 2018
Publication title -
international economic review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.658
H-Index - 86
eISSN - 1468-2354
pISSN - 0020-6598
DOI - 10.1111/iere.12285
Subject(s) - portfolio , capital asset pricing model , market liquidity , economics , stock (firearms) , asset (computer security) , stock market , replicating portfolio , financial economics , econometrics , portfolio optimization , monetary economics , computer science , mechanical engineering , paleontology , computer security , horse , biology , engineering
Can households' inattention to the stock market quantitatively account for the inertia in portfolio rebalancing? I address this question by introducing an observation cost into a production economy with heterogeneous agents. In this environment, inattention changes endogenously over time and across agents. I find that inattention explains the inertia in portfolio rebalancing and its heterogeneity across households. Inattention also rationalizes the limited stock market participation observed in the data and improves the asset pricing performance of the model. Finally, I present a novel testable implication linking the effects of inattention on portfolio choices and asset prices to households' funding liquidity.