The Duration Puzzle in Life-Cycle Investment

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

doi:10.2139/ssrn.3308174

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The Duration Puzzle in Life-Cycle Investment

50 Pages Posted: 9 Jan 2019 Last revised: 13 Jun 2019

See all articles by Servaas van Bilsen

Servaas van Bilsen

University of Amsterdam - Department of Quantitative Economics

Ilja Boelaars

University of Chicago - Department of Economics; ING Bank N.V.

A. Lans Bovenberg

Tilburg University - Center for Economic Research (CentER); Centre for Economic Policy Research (CEPR); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: June 8, 2019

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, discount rate variation in the stock price, 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.

Keywords: Life-Cycle Investment, Target Date Funds, Long-Term Bonds, Interest Rate Risk Management

JEL Classification: C61, D15, D52, G11, G13

Suggested Citation: Suggested Citation

van Bilsen, Servaas and Boelaars, Ilja and Bovenberg, A. Lans, The Duration Puzzle in Life-Cycle Investment (June 8, 2019). Available at SSRN: https://ssrn.com/abstract=3308174 or http://dx.doi.org/10.2139/ssrn.3308174