Subsistence consumption, habit formation and the demand for the long-term bonds

Research output: Contribution to journalArticle

3 Scopus citations

Abstract

Who should buy long-term bonds? Conventional wisdom holds that bonds are appropriate for "conservative" investors and equities for more "aggressive" investors, a statement which previous research has interpreted exclusively in terms of risk aversion. Assuming only complete markets, investors demand long-term bonds whenever their preferences are such that they will not allow their standard of living to fall below a certain threshold. In particular, we show that investors whose preferences exhibit habit formation hold portfolios that always include long-term bonds.

Original languageEnglish (US)
Pages (from-to)273-287
Number of pages15
JournalJournal of Economics and Business
Volume57
Issue number4
DOIs
StatePublished - Jul 1 2005
Externally publishedYes

Keywords

  • Aggressive
  • Conservative
  • Portfolios

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics

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