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Discussion Paper Details

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Title: Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns

Author(s): Philippe Bacchetta and Eric van Wincoop

Publication Date: April 2017

Keyword(s): gradual portfolio adjustment, international portfolio allocation and predictable excess returns

Programme Area(s): International Macroeconomics and Finance

Abstract: Modern open economy macro models assume the continuous adjustment of international portfolio allocation. We introduce gradual portfolio adjustment into a global equity market model. Our approach differs from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fixed, leading to a smoother response to shocks. Second, rather than only considering asset returns, we also use data on portfolio shares to confront the model to the data. Conditional on reasonable risk aversion, we find that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average.

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Bibliographic Reference

Bacchetta, P and van Wincoop, E. 2017. 'Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=11983