Who Should Buy Long-Term Bonds?

John Y. Campbell () and Luis M. Viceira ()

Harvard Institute of Economic Research Working Papers from Harvard - Institute of Economic Research

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 the 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.

New Economics Papers: this item is included in nep-dge and nep-fin
Date: 2000
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ftp://all.repec.org/RePEc/fth/harver/hier1895.pdf (application/pdf)

Related works:
Working Paper: Who Should Buy Long-Term Bonds? (1998)
Working Paper: Who Should Buy Long-Term Bonds? (1998)
Journal Article: Who Should Buy Long-Term Bonds? (2001)
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