Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield

John Campbell and Roman Sigalov

No 27025, NBER Working Papers from National Bureau of Economic Research, Inc

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 risktaking 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 risktaking.

JEL-codes: E43 G11 (search for similar items in EconPapers)
Date: 2020-04
New Economics Papers: this item is included in nep-env, nep-mac, nep-ore and nep-upt
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Citations: View citations in EconPapers (6)

Published as John Y. Campbell & Roman Sigalov, 2021. "Portfolio choice with sustainable spending: A model of reaching for yield," Journal of Financial Economics, .

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