Portfolio choice with sustainable spending: A model of reaching for yield

John Campbell and Roman Sigalov

Journal of Financial Economics, 2022, vol. 143, issue 1, 188-206

Abstract: We show that reaching for yield—a tendency to take more risk when the real interest rate declines while the risk premium remains constant—results from imposing a sustainable spending constraint on an otherwise standard infinitely lived investor with power utility. When the interest rate is initially low, reaching for yield intensifies. The sustainable spending constraint also affects the response of risk-taking to a change in the risk premium, which can even change sign. In a variant of the model where the sustainable spending constraint is formulated in nominal terms, low inflation also encourages risk-taking.

Keywords: Reaching for yield; Endowments; Sustainable spending; Portfolio choice (search for similar items in EconPapers)
JEL-codes: G11 G23 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (12)

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Working Paper: Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:143:y:2022:i:1:p:188-206

DOI: 10.1016/j.jfineco.2021.05.018

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