The Duration Puzzle in Life-Cycle Investment*

Servaas van Bilsen, Ilja A Boelaars and A. Lans Bovenberg

Review of Finance, 2020, vol. 24, issue 6, 1271-1311

Abstract: By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.

Keywords: Life-cycle investment; Target date funds; Long-term bonds; Interest rate risk management (search for similar items in EconPapers)
JEL-codes: C61 D15 D52 G11 G13 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (2)

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