Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield
53 Pages Posted: 19 Mar 2020 Last revised: 8 Oct 2020
Date Written: April 14, 2020
We show that reaching for yield---a tendency to take more risk when the real interest rate declines while the risk premium remains constant---results from imposing a sustainable spending constraint on an otherwise standard infinitely lived investor with power utility. When the interest rate is initially low, reaching for yield intensifies. The sustainable spending constraint also affects the response of risktaking to a change in the risk premium, which can even change sign. In a variant of the model where the sustainable spending constraint is formulated in nominal terms, low inflation also encourages risktaking.
Keywords: Reaching for yield, endowments, sustainable spending, portfolio choice
JEL Classification: G11
Suggested Citation: Suggested Citation