Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing? | Zendy

YiLi Chien | Zendy; Harold L. Cole | Zendy; Hanno Lustig | Zendy

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Is the Volatility of the Market Price of Risk Due to Intermittent Portfolio Rebalancing?

Author(s) -

YiLi Chien,

Harold L. Cole,

Hanno Lustig

Publication year - 2012

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.102.6.2859

Subject(s) - economics , volatility (finance) , portfolio , monetary economics , risk premium , financial economics , risk compensation , systematic risk , aggregate demand , monetary policy , medicine , family medicine , human immunodeficiency virus (hiv)

Our paper examines whether the failure of unsophisticated investors to rebalance their portfolios can help to explain the countercyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which a large mass of investors do not rebalance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors do. We find that intermittent rebalancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times. (JEL D14, E32, G11, G12)

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