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dc.contributor.authorSangvinatsos, Antonios-
dc.contributor.authorWachter, Jessica-
dc.date.accessioned2008-05-30T20:56:43Z-
dc.date.available2008-05-30T20:56:43Z-
dc.date.issued2003-11-21-
dc.identifier.urihttp://hdl.handle.net/2451/27310-
dc.description.abstractWe 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.en
dc.language.isoen_USen
dc.relation.ispartofseriesS-MF-03-02en
dc.titleDoes the Failure of the Expectations Hypothesis Matter for Long-Term Investors?en
dc.typeWorking Paperen
Appears in Collections:Macro Finance

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