Review of Financial Studies Vol. 23 No. 2 2010
When Can Life Cycle Investors Benefit from Time-Varying Bond Risk Premia?
Abstract
[We study the importance of time-varying bond risk premia in a consumption and portfoliochoice problem for a life-cycle investor facing short-sales and borrowing constraints. Tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life-cycle patterns. We find that the investor is willing to pay an annual fee up to 1% to implement a strategy that optimally conditions on prevailing bond risk premia in addition to her age and wealth. To solve our model, we extend recently developed simulation-based techniques to life-cycle problems featuring multiple state variables and multiple risky assets.]
- Volume
- 23
- Issue
- 2
- Pages
- 741-780
- Sources
- bibtex:phds-export.bib