Working Paper: CEPR ID: DP14898
Authors: Philippe Bacchetta; Simon Tiche; Eric Van Wincoop
Abstract: Using data on international equity portfolio allocations of US mutual funds, we estimate a simple portfolio expression derived from a standard Markowitz mean-variance portfolio model extended with portfolio frictions. The optimal portfolio depends on two benchmark portfolios, the previous month and the buy-and-hold portfolio shares, and a present discounted value of expected future excess returns. We show that equity return differentials are predictable and use the expected return differentials in the mutual fund portfolio regressions. The estimated reduced form parameters are related to the structural model parameters. The estimates imply significant portfolio frictions and a modest rate of risk-aversion. While mutual fund portfolios respond significantly to expected returns, portfolio frictions lead to a weaker and more gradual portfolio response to changes in expected returns.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| portfolio frictions (G11) | portfolio adjustments (G11) |
| expected return differentials (G19) | mutual fund portfolio allocations (G11) |
| risk aversion (D81) | effect of portfolio frictions on portfolio response to expected returns (G11) |
| estimated reduced form parameters (C51) | structural model parameters (C51) |