Working Paper: NBER ID: w16957
Authors: Yosef Bonaparte; Russell Cooper; Guozhong Zhu
Abstract: This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.
Keywords: Consumption Smoothing; Portfolio Rebalancing; Adjustment Costs
JEL Codes: E21; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| income shock (E25) | bond holdings (G12) |
| income shock (E25) | stock holdings (G12) |
| income shock (E25) | consumption smoothing (D15) |
| large income shock (G59) | stock holdings (G12) |
| large income shock (G59) | bond holdings (G12) |
| return shock (Y60) | stock holdings (G12) |
| return shock (Y60) | bond holdings (G12) |
| negative return shock (E32) | stock holdings (G12) |
| negative return shock (E32) | bond holdings (G12) |