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http://ssrn.com/abstract=795925
 
 

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When Can Life-Cycle Investors Benefit from Time-Varying Bond Risk Premia?


Ralph S. J. Koijen


London Business School - Department of Finance; National Bureau of Economic Research (NBER)

Theo Nijman


Tilburg University - Center and Faculty of Economics and Business Administration

Bas J. M. Werker


Tilburg University - Center for Economic Research (CentER)

February 3, 2009

EFA 2007 Ljubljana Meetings Paper

Abstract:     
We study the economic importance of time-varying bond risk premia in a life-cycle consumption and portfolio-choice problem for an investor facing short-sales and borrowing constraints. On average, the investor is able to time bond markets only as of age~45. Tilts in the optimal asset allocation in response to changes in bond risk premia exhibit pronounced life-cycle patterns. Taking as a point of reference an investor who conditions only on age and wealth, we compute the management fee this investor is willing to pay to account for either current risk premia or for both current and future risk premia. We find the fees to account for current risk premia to be economically sizeable, ranging up to 1\% per annum, but this fee is comparable to the fee of the fully optimal strategy. To solve our model, we extend recently developed simulation-based techniques to life-cycle problems featuring multiple state variables and multiple risky assets.

Number of Pages in PDF File: 49

Keywords: bond risk premia, life-cycle consumption, portfolio choice

JEL Classification: D91, E43, G11, G12

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Date posted: March 1, 2007 ; Last revised: February 4, 2009

Suggested Citation

Koijen, Ralph S. J. and Nijman, Theo and Werker, Bas J. M., When Can Life-Cycle Investors Benefit from Time-Varying Bond Risk Premia? (February 3, 2009). EFA 2007 Ljubljana Meetings Paper. Available at SSRN: http://ssrn.com/abstract=795925 or http://dx.doi.org/10.2139/ssrn.795925

Contact Information

Ralph S. J. Koijen (Contact Author)
London Business School - Department of Finance ( email )
Sussex Place
Regent's Park
London NW1 4SA
United Kingdom
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Theo E. Nijman
Tilburg University - Center and Faculty of Economics and Business Administration ( email )
P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 13 466 2342 (Phone)
+31 13 466 3280 (Fax)
Bas J.M. Werker
Tilburg University - Center for Economic Research (CentER) ( email )
Econometrics and Finance Group
5000 LE Tilburg
Netherlands
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