Present Bias, Asset Allocation, and Bond Behavior
45 Pages Posted: 23 Nov 2020 Last revised: 13 May 2022
Date Written: May 13, 2022
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: Suggested Citation