When can life-cycle investors benefit from time-varying bond risk premia?

R.S.J. Koijen, T.E. Nijman, B.J.M. Werker

Research output: Contribution to journalArticleScientificpeer-review

Abstract

We study the importance of time-varying bond risk premia in a consumption and portfolio-choice problem for a life-cycle investor facing short-sales and borrowing constraints. Tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life-cycle patterns. We find that the investor is willing to pay an annual fee up to 1% to implement a strategy that optimally conditions on prevailing bond risk premia in addition to her age and wealth. To solve our model, we extend recently developed simulation-based techniques to life-cycle problems featuring multiple state variables and multiple risky assets.
Original languageEnglish
Pages (from-to)741-780
JournalThe Review of Financial Studies
Volume23
Issue number2
DOIs
Publication statusPublished - 2010

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Investors
Time-varying
Life cycle
Risk premia
Wealth
Simulation
Short-sale constraints
Borrowing constraints
Assets
Optimal asset allocation
Fees
Portfolio choice
State variable

Cite this

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title = "When can life-cycle investors benefit from time-varying bond risk premia?",
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When can life-cycle investors benefit from time-varying bond risk premia? / Koijen, R.S.J.; Nijman, T.E.; Werker, B.J.M.

In: The Review of Financial Studies, Vol. 23, No. 2, 2010, p. 741-780.

Research output: Contribution to journalArticleScientificpeer-review

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