Portfolio Rebalancing across the Investment Universe

The demand system of Koijen and Yogo (2019) provides a novel framework to jointly study asset prices and portfolio holdings. While the literature is expanding rapidly, the focus lies on marketable assets like bonds and equity. This study extends the empirical setting to incorporate nonmarketables such as loans and deposits. I document stylized facts regarding investor mandates and market structure to highlight the importance of nonmarketables in asset allocation. I propose the Algorithmic Instrument Variable approach to tackle the endogeneity issue arising from the joint determination of asset demand and return. The main finding is that the elasticities of nonmarketables are surprisingly negative across various investment sectors. That is, portfolio weights in loans and deposits decrease as returns increase. Regarding marketables, this study is the first to estimate their elasticities when incorporating nearly all financial assets in the system. The results show that their elasticities may be overstated in previous studies.