Keywords

rebalancing, portfolio theory, overlapping generations

Abstract

Standard portfolio advice is that agents should hold a constant share of risky assets. All agents cannot, however, follow this advice because supply and demand of risky assets must be equal. To study equilibrium rebalancing, the paper develops an overlapping generations model in which agents differ both in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that affects levered and unlevered agents in opposite directions, an aggregate risk tolerance effect which depends on the distribution of wealth, and an intertemporal hedging effect. Optimal equilibrium portfolio rebalancing departs significantly from the standard advice.

Original Publication Citation

Portfolio Rebalancing in General Equilibrium, 2020, with Miles S. Kimball, Matthew D. Shapiro, and Jing Zhang, Journal of Financial Economics

Document Type

Peer-Reviewed Article

Publication Date

2011

Publisher

Journal of Financial Economics

Language

English

College

Marriott School of Business

Department

Finance

University Standing at Time of Publication

Full Professor

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