Does the Failure of the Expectations Hypothesis Matter for Long-Term Investors?

Antonios Sangvinatsos and Jessica A. Wachter ()

Journal of Finance, 2005, vol. 60, issue 1, pages 179-230

Abstract: We solve the portfolio problem of a long-run investor when the term structure is Gaussian and when the investor has access to nominal bonds and stock. We apply our method to a three-factor model that captures the failure of the expectations hypothesis. We extend this model to account for time-varying expected inflation, and estimate the model with both inflation and term structure data. The estimates imply that the bond portfolio of a long-run investor looks very different from the portfolio of a mean-variance optimizer. In particular, time-varying term premia generate large hedging demands for long-term bonds. Copyright 2005 by The American Finance Association.

Date: 2005
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Working Paper: Does the Failure of the Expectations Hypothesis Matter for Long-Term Investors (2003)
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