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When can life-­cyle investors benefit from time-varying bond risk premia?

Journal

Review of Financial Studies

Subject

Finance

Publication Year

2010

Abstract

We study the importance of time-varying bond risk premia in a consumption and portfolio-choice 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.

Publication Research Centre

Institute of Finance and Accounting

Available on ECCH

No


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