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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26670
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| Title: | Does the Failure of the Expectations Hypothesis Matter for Long-Term Investors? |
| Authors: | Sangvinatsos, Antonios
Wachter, Jessica |
| Issue Date: | 21-Jan-2003 |
| Series/Report no.: | SC-AM-03-02 |
| Abstract: | We consider the consumption and portfolio choice problem of a long-run
investor when the term structure is affine and when the investor has
access to nominal bonds and a stock portfolio. In the presence of
unhedgeable inflation risk, there exist multiple pricing kernels that
produce the same bond prices, but a unique pricing kernel equal to the
marginal utility of the investor. We apply our method to a three-factor
Gaussian model with a time-varying price of risk that captures the
failure of the expectations hypothesis seen in the data. We extend this
model to account for time-varying expected inflation, and estimate the
model with both inflation and term structure data. The estimates imply
that the bond portfolio for the long-run investor looks very different
from the portfolio of a mean-variance optimizer. In particular, the
desire to hedge changes in term premia generates large hedging demands
for long-term bonds. |
| URI: | http://hdl.handle.net/2451/26670 |
| Appears in Collections: | Asset Management
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