Working Paper: NBER ID: w24722
Authors: Miles S. Kimball; Matthew D. Shapiro; Tyler Shumway; Jing Zhang
Abstract: This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.
Keywords: portfolio rebalancing; general equilibrium; risk tolerance; macroeconomic shocks
JEL Codes: D53; E44; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| negative macroeconomic shock (E39) | more risk-averse investors buy risky assets (G11) |
| negative macroeconomic shock (E39) | less risk-averse investors sell risky assets (G11) |
| positive macroeconomic shock (F41) | risk-averse investors sell risky assets (G11) |
| positive macroeconomic shock (F41) | less risk-averse investors buy risky assets (G11) |
| negative macroeconomic shock (E39) | all investors hold a higher risky asset share (G11) |
| falling prices (E31) | risk-tolerant investors increase risky asset share (G11) |
| falling prices (E31) | affect aggregate risk tolerance (G40) |