American Economic Review
ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)
Who Should Buy Long-Term Bonds?
American Economic Review
vol. 91,
no. 1, March 2001
(pp. 99–127)
Abstract
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.Citation
Campbell, John, Y., and LuisM. Viceira. 2001. "Who Should Buy Long-Term Bonds?" American Economic Review, 91 (1): 99–127. DOI: 10.1257/aer.91.1.99JEL Classification
- D15 Intertemporal Consumer Choice; Life Cycle Models and Saving
- G11 Portfolio Choice; Investment Decisions