Bond Ladders and Optimal Portfolios

This paper examines portfolios within the framework of a dynamic asset-pricingmodel when investors can trade equity assets as well as bonds of many different matu-rities. We specify the model so that investors have demand for both a risky and a safeincome stream. We characterize the resulting optimal equilibrium stock and bond port-folios and document that optimal bond investment strategies partly exhibit a ladderstructure, if a sufficient number of bonds is available for trade.[...]

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Authors:	Judd, Kenneth L. ; Kubler, Felix ; Schmedders, Karl
Institutions:	National Centre of Competence in ResearchFinancial Valuation and Risk Management
Subject:	Investitionsrisiko \| Portfoliomanagement \| portfolio management \| Anleihe

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1 Introduction
2 The Asset Market Economy
2.1 Dynamically Complete Markets
2.2 HARA Utility and Linear Sharing Rules
3 Portfolios with a Consol
3.1 Two-Fund Monetary Separation
3.2 The Consol is the Riskless Asset
3.3 Illustrative Example: Consol vs. Short-lived Bonds
4 Portfolios with Many Finite-Maturity Bonds
5 Multiple Finite-Maturity Bonds Span the Consol
5.1 Equilibrium Portfolios with IID Dividends
5.2 Spanning the Consol
5.3 Identical Persistence Across Stocks and States
6 Nearly Optimal Portfolios with Bond Ladders
6.1 A Limit Result for Bond Ladders
6.2 Welfare Measure for Portfolios
6.3 Portfolios with Bond Ladders
7 Concluding Discussion
7.1 On the Asset Allocation Puzzle
7.2 Limitations and Implications
Appendix
A Equilibrium in Dynamically Complete Markets
B Technical Details
C Additional Results
References

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