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.
ASJC Scopus subject areas
- Business, Management and Accounting(all)
- Economics and Econometrics