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Université de Lausanne
Faculté des HEC
Département d'économétrie et d'économie politique

Cahier de recherches économiques du DEEP No. 17.05

Philippe Bacchetta and Eric Van Wincoop


Gradual Portfolio Adjustment: Implications for Global Equity Portfolios and Returns

April 19, 2017

Abstract

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 di ffers from related literature in two key dimensions. First, the time interval between portfolio decisions is stochastic rather than fi xed, 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 fi nd that the data is consistent with infrequent portfolio decisions, with a frequency of at most once in 15 months on average.

JEL Classification: F30, F41, G11, G12

Keywords: gradual portfolio adjustment, international portfolio allocation, predictable excess returns

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