Bond ladders and optimal portfolios

Kenneth L. Judd; Felix Kubler; Karl H Schmedders

doi:10.1093/rfs/hhr074

Bond ladders and optimal portfolios

Kenneth L. Judd, Felix Kubler, Karl H Schmedders^*

^*Corresponding author for this work

EMBA Evanston

Research output: Contribution to journal › Article › peer-review

5 Scopus citations

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.

Original language	English (US)
Pages (from-to)	4123-4166
Number of pages	44
Journal	Review of Financial Studies
Volume	24
Issue number	12
DOIs	https://doi.org/10.1093/rfs/hhr074
State	Published - Dec 2011

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics

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AB - 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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Bond ladders and optimal portfolios

Abstract

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