When Can Life Cycle Investors Benefit from Time-Varying Bond Risk Premia?
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. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: firstname.lastname@example.org, Oxford University Press.
Volume (Year): 23 (2010)
Issue (Month): 2 (February)
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