Consumption smoothing and portfolio rebalancing: The effects of adjustment costs

Yosef Yonaparte, Russell Cooper, Guozhong Zhu

Research output: Contribution to journalArticlepeer-review

5 Scopus citations

Abstract

A household's response to income and return shocks depends on the costs of portfolio adjustment. In particular, the extent of portfolio rebalancing and consumption smoothing are influenced by the presence of non-convex portfolio adjustment costs. Suppose bonds can be adjusted costlessly while adjustments to stock accounts entail adjustment costs. Due to these portfolio adjustment costs, the household demands both stocks and bonds. A household can buffer some income fluctuations without incurring adjustment costs and engage in costly portfolio rebalancing less frequently. Using the estimated preference parameters and portfolio adjustment costs, the response to income and return shocks is nonlinear and reflects the interaction of portfolio rebalancing and consumption smoothing.

Original languageEnglish (US)
Pages (from-to)751-768
Number of pages18
JournalJournal of Monetary Economics
Volume59
Issue number8
DOIs
StatePublished - Dec 2012

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

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