Risk Aversion and Allocation to Long-Term Bonds

8 Pages Posted: 3 Nov 2008

See all articles by Jessica A. Wachter

Jessica A. Wachter

University of Pennsylvania - Finance Department; National Bureau of Economic Research (NBER)

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Date Written: November 2001

Abstract

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T. Previous work on bond allocation requires a specific model for equities, the term structure, and the investor's utility function. In contrast, the only substantive assumption required for the analysis in this paper is that markets are complete. The result, which holds regardless of the underlying investment opportunities and the utility function, formalizes the "preferred habitat" intuition of Modigliani and Sutch.

Suggested Citation

Wachter, Jessica A., Risk Aversion and Allocation to Long-Term Bonds (November 2001). NYU Working Paper No. FIN-01-067, Available at SSRN: https://ssrn.com/abstract=1294612

Jessica A. Wachter (Contact Author)

University of Pennsylvania - Finance Department ( email )

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