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Portfolio Rebalancing in General Equilibrium

Miles S. Kimball, Matthew D. Shapiro, Tyler Shumway, Jing Zhang

NBER Working Paper No. 24722
Issued in June 2018
NBER Program(s):The Asset Pricing Program, The Economic Fluctuations and Growth Program, The Monetary Economics Program

This paper develops an overlapping generations model of optimal rebalancing where agents differ in age and risk tolerance. Equilibrium rebalancing is driven by a leverage effect that influences levered and unlevered agents in opposite directions, an aggregate risk tolerance effect that depends on the distribution of wealth, and an intertemporal hedging effect. After a negative macroeconomic shock, relatively risk tolerant investors sell risky assets while more risk averse investors buy them. Owing to interactions of leverage and changing wealth, however, all agents have higher exposure to aggregate risk after a negative macroeconomic shock and lower exposure after a positive shock.

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Document Object Identifier (DOI): 10.3386/w24722

Published: Miles S. Kimball & Matthew D. Shapiro & Tyler Shumway & Jing Zhang, 2019. "Portfolio Rebalancing in General Equilibrium," Journal of Financial Economics, .

 
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