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Risk Aversion and Allocation to Long-Term Bonds

Authors: Wachter, Jessica
Issue Date: Nov-2001
Series/Report no.: FIN-01-067
Abstract: As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T. Previous work on bond allocation requires a specific model for equities, the term structure, and the investor's utility function. In contrast, the only substantive assumption required for the analysis in this paper is that markets are complete. The result, which holds regardless of the underlying investment opportunities and the utility function, formalizes the "preferred habitat" intuition of Modigliani and Sutch.
Appears in Collections:Economics Working Papers

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