TY  - JOUR
AU  - Chien,Yi-Li
AU  - Cole,Harold L.
AU  - Lustig,Hanno
TI  - Is the Volatility of the Market Price of Risk due to Intermittent Portfolio Re-balancing?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 15382
PY  - 2009
Y2  - September 2009
UR  - http://www.nber.org/papers/w15382
L1  - http://www.nber.org/papers/w15382.pdf
N1  - Author contact info:
Yi-Li Chien
403 West State Street
Krannert School of Management
Purdue University
West Lafayette
IN 47907
Tel: 765-494-4438
E-Mail: yilichien@gmail.com

Harold L. Cole
Economics Department
University of Pennsylvania
3718 Locust Walk
160 McNeil Building
Philadelphia, PA 19104
Tel: 215-898-7788
E-Mail: colehl@sas.upenn.edu

Hanno Lustig
UCLA Anderson School of Management
110 Westwood Plaza, Suite C413
Los Angeles, CA 90095-1481
Tel: 310/825-1011
Fax: 310/825-9528
E-Mail: hlustig@anderson.ucla.edu
AB  - Our paper examines whether the well-documented failure of unsophisticated investors to rebalance their portfolios can help to explain the enormous counter-cyclical volatility of aggregate risk compensation in financial markets. To answer this question, we set up a model in which CRRA-utility investors have heterogeneous trading technologies. In our model, a large mass of investors do not re-balance their portfolio shares in response to aggregate shocks, while a smaller mass of active investors adjust their portfolio each period to respond to changes in the investment opportunity set. We find that these intermittent re-balancers more than double the effect of aggregate shocks on the time variation in risk premia by forcing active traders to sell more shares in good times and buy more shares in bad times.
ER  -