NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Consumption Smoothing and Portfolio Rebalancing: The Effects of Adjustment Costs

Yosef Bonaparte, Russell Cooper, Guozhong Zhu

NBER Working Paper No. 16957
Issued in April 2011
NBER Program(s):   EFG

This paper studies the dynamics of portfolio rebalancing and consumption smoothing in the presence of non-convex portfolio adjustment costs. The goal is to understand a household's response to income and return shocks. The model includes the choice of two assets: one riskless without adjustment costs and a second risky asset with adjustment costs. With these multiple assets, a household can buffer some income fluctuations through the asset without adjustment costs and engage in costly portfolio rebalancing less frequently. We estimate both preference parameters and portfolio adjustment costs. The estimates are used for evaluating consumption smoothing and portfolio adjustment in the face of income and return shocks.

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Document Object Identifier (DOI): 10.3386/w16957

Published: Bonaparte, Yosef & Cooper, Russell & Zhu, Guozhong, 2012. "Consumption smoothing and portfolio rebalancing: The effects of adjustment costs," Journal of Monetary Economics, Elsevier, vol. 59(8), pages 751-768. citation courtesy of

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