Yosef Bonaparte, Russell Cooper, Guozhong Zhu
Journal of Monetary Economics,Vol. 59, Issue 8, Pages: 751-768.
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 …