Present Bias, Asset Allocation and the Yield Curve

50 Pages Posted: 23 Nov 2020 Last revised: 22 Dec 2020

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: September 21, 2020

Abstract

This paper presents a present-biased general equilibrium model that explains many features of bond behavior. Present-biased investors increase (decrease) short-term (long-term) hedge demands compared to standard preferences. Hence, present bias drives up (down) short-term bond prices (yields) and drives down (up) long-term bond prices (yields), explaining the bond premium puzzle. The model produces realistic bond behavior with a present-bias factor of beta=0.35 and a long-term annual discount factor of delta=0.97, in line with the experimental literature. Bond behavior is best explained for a present-bias interval of at most 1 year, providing an estimate for the investor's duration of the present.

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

JEL Classification: G41, G11, G12

Suggested Citation

Goossens, Jorgo T.G. and Werker, Bas J.M., Present Bias, Asset Allocation and the Yield Curve (September 21, 2020). 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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