Review of Finance Vol. 24 No. 6 2020

The Duration Puzzle in Life-Cycle Investment

Servaas van Bilsen¹; Ilja A Boelaars²; A.L. Bovenberg³

¹ University of Amsterdam and NETSPAR · ² University of Chicago · ³ Tilburg University—CentER and NETSPAR

Abstract

By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.

DOI

10.1093/rof/rfaa009

Volume

24

Issue

6

Pages

1271-1311

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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