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Bond ladders and optimal portfolios


Judd, Kenneth L; Kübler, Felix; Schmedders, Karl (2011). Bond ladders and optimal portfolios. Review of Financial Studies, 24(12):4123-4166.

Abstract

We analyze complex bond portfolios within the framework of a dynamic general equilibrium asset-pricing model. Equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets. Instead, portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies. The welfare loss of these simple investment strategies, when compared to the equilibrium portfolio, converges to zero as the length of the bond ladder increases. This article, therefore, provides a rationale for naming bond ladders as a popular bond investment strategy.

Abstract

We analyze complex bond portfolios within the framework of a dynamic general equilibrium asset-pricing model. Equilibrium bond portfolios are nonsensical and imply a trading volume that vastly exceeds observed trading volume on financial markets. Instead, portfolios that combine bond ladders with a market portfolio of equity assets are nearly optimal investment strategies. The welfare loss of these simple investment strategies, when compared to the equilibrium portfolio, converges to zero as the length of the bond ladder increases. This article, therefore, provides a rationale for naming bond ladders as a popular bond investment strategy.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:2011
Deposited On:10 Jan 2012 13:02
Last Modified:11 Sep 2017 01:00
Publisher:Oxford University Press
ISSN:0893-9454
Free access at:Related URL. An embargo period may apply.
Publisher DOI:https://doi.org/10.1093/rfs/hhr074
Related URLs:http://dx.doi.org/10.2139/ssrn.1289257
Other Identification Number:merlin-id:6433

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