Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield

54 Pages Posted: 20 Apr 2020 Last revised: 5 Nov 2022

See all articles by John Y. Campbell

John Y. Campbell

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Roman Sigalov

Harvard University, Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: April 2020

Abstract

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.

Suggested Citation

Campbell, John Y. and Sigalov, Roman, Portfolio Choice with Sustainable Spending: A Model of Reaching for Yield (April 2020). NBER Working Paper No. w27025, Available at SSRN: https://ssrn.com/abstract=3580583

John Y. Campbell (Contact Author)

Harvard University - Department of Economics ( email )

Littauer Center
Room 213
Cambridge, MA 02138
United States
617-496-6448 (Phone)
617-495-7730 (Fax)

HOME PAGE: http://scholar.harvard.edu/campbell

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Roman Sigalov

Harvard University, Department of Economics ( email )

Cambridge, MA 02138

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
11
Abstract Views
275
PlumX Metrics