Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns

Philippe Bacchetta, Eric van Wincoop

NBER Working Paper No. 23363
Issued in April 2017
NBER Program(s):Asset Pricing, International Finance and Macroeconomics

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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Document Object Identifier (DOI): 10.3386/w23363

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