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Portfolio rebalancing and asset pricing with heterogeneous inattention

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  • Omar Rachedi

    (Banco de España)

Abstract

Can households’ inattention to the stock market quantitatively account for the inertia in portfolio rebalancing? I address this question by introducing an observation cost into a production economy with heterogeneous agents. In this environment inattention changes endogenously over time and across agents. I find that inattention explains the inertia in portfolio rebalancing and its heterogeneity across households. Inattention also rationalises the limited stock market participation observed in the data, and improves the asset pricing performance of the model. Finally, I present a novel testable implication linking the effects of inattention on portfolio choices and asset prices to households’ funding liquidity.

Suggested Citation

  • Omar Rachedi, 2016. "Portfolio rebalancing and asset pricing with heterogeneous inattention," Working Papers 1633, Banco de España.
    • Handle: RePEc:bde:wpaper:1633
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    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/16/Fich/dt1633e.pdf
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    References listed on IDEAS

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    1. Omar Rachedi, 2018. "Portfolio Rebalancing And Asset Pricing With Heterogeneous Inattention," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 699-726, May.
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    Cited by:

    1. Omar Rachedi, 2018. "Portfolio Rebalancing And Asset Pricing With Heterogeneous Inattention," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 59(2), pages 699-726, May.
    2. Lorenzo Menna, 2016. "Optimal Fiscal and Monetary Policies Under Limited Asset Market Participation," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(3), pages 363-383, November.

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    1. Lorenzo Menna, 2016. "Optimal Fiscal and Monetary Policies Under Limited Asset Market Participation," Italian Economic Journal: A Continuation of Rivista Italiana degli Economisti and Giornale degli Economisti, Springer;Società Italiana degli Economisti (Italian Economic Association), vol. 2(3), pages 363-383, November.

    More about this item

    Keywords

    observation cost; limited stock market participation; equity premium;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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