Present Bias, Asset Allocation, and Bond Behavior

45 Pages Posted: 23 Nov 2020 Last revised: 13 May 2022

See all articles by Jorgo T.G. Goossens

Jorgo T.G. Goossens

Tilburg University - Department of Econometrics & Operations Research

Bas J. M. Werker

Tilburg University - Center for Economic Research (CentER)

Date Written: May 13, 2022

Abstract

This paper presents a present-biased general equilibrium model that explains multiple features of bond behavior. Present-biased investors increase short-term hedge demands to satisfy short-term needs, compared to standard time-consistent preferences. Hence, a present-biased investor drives down short-term yields and requires a premium on long-term bonds, explaining the upward sloping yield curve. Observed bond behavior is best explained for a short-term orientation of at most 1 year, providing an estimate for the investor's ''duration of the present''.

Keywords: hyperbolic discounting, portfolio choice, term structure of interest rates, duration present, behavioral finance

JEL Classification: E43, G11, G12, G4

Suggested Citation

Goossens, Jorgo T.G. and Werker, Bas J.M., Present Bias, Asset Allocation, and Bond Behavior (May 13, 2022). Available at SSRN: https://ssrn.com/abstract=3696455 or http://dx.doi.org/10.2139/ssrn.3696455

Jorgo T.G. Goossens (Contact Author)

Tilburg University - Department of Econometrics & Operations Research

Tilburg, 5000 LE
Netherlands

Bas J.M. Werker

Tilburg University - Center for Economic Research (CentER) ( email )

Econometrics and Finance Group
5000 LE Tilburg
Netherlands

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