Consumption Smoothing and Portfolio Rebalancing: The effects of adjustment costs
Title: Consumption Smoothing and Portfolio Rebalancing: The effects of adjustment costs
Series/Report no.: NBER Working Paper; 2011/16957
External link: http://www.nber.org/papers/w16957.pdf
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.
Issued in April 2011
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