Ross School of Business
University of Michigan
701 Tappan Street
Ann Arbor, MI 48109-1234
Institutional Affiliation: University of Michigan
NBER Working Papers and Publications
|June 2018||Portfolio Rebalancing in General Equilibrium|
with Miles S. Kimball, Matthew D. Shapiro, Jing Zhang: w24722
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.
Published: Miles S. Kimball & Matthew D. Shapiro & Tyler Shumway & Jing Zhang, 2019. "Portfolio Rebalancing in General Equilibrium," Journal of Financial Economics, .