Unbalanced portfolios fuel market volatility, impacting risk compensation for all.
The article explores if investors not adjusting their portfolios during market changes affects the volatility of risk compensation. The researchers created a model where some investors rebalance their portfolios while others don't. They discovered that the lack of rebalancing by some investors amplifies the impact of market shocks on risk premiums. This leads active traders to sell more shares when the market is doing well and buy more when it's not, causing risk compensation to fluctuate more.