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Who Should Buy Long-Term Bonds?

  • Viceira, Luis
  • Campbell, John

According to conventional wisdom, long-term bonds are appropriate for conservative long-term investors. This paper develops a model of optimal consumption and portfolio choice for infinite-lived investors with recursive utility who face stochastic interest rates, solves the model using an approximate analytical method, and evaluates conventional wisdom. As risk aversion increases, the myopic component of risky asset demand disappears but the intertemporal hedging component does not. Conservative investors hold assets to hedge the risk that real interest rates will decline. Long-term inflation-indexed bonds are most suitable for this purpose, but nominal bonds may also be used if inflation risk is low.

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Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 3128709.

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Date of creation: 2001
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Publication status: Published in American Economic Review
Handle: RePEc:hrv:faseco:3128709
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