DP11983 Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns

Author(s): Philippe Bacchetta, Eric van Wincoop
Publication Date: April 2017
Keyword(s): gradual portfolio adjustment, international portfolio allocation, predictable excess returns
JEL(s): F30, F41, G11, G12
Programme Areas: International Macroeconomics and Finance
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11983

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.