Who Should Buy Long-Term Bonds? | Zendy

John Y. Campbell | Zendy; Luis M. Viceira | Zendy

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Who Should Buy Long-Term Bonds?

Author(s) -

John Y. Campbell,

Luis M. Viceira

Publication year - 2001

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.91.1.99

Subject(s) - bond , economics , inflation (cosmology) , term (time) , hedge , portfolio , asset (computer security) , interest rate , risk aversion (psychology) , consumption (sociology) , financial economics , yield curve , risk premium , econometrics , asset allocation , monetary economics , microeconomics , expected utility hypothesis , finance , computer science , ecology , social science , physics , computer security , quantum mechanics , sociology , theoretical physics , biology

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 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.

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