Bond ladders and optimal portfolios

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

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

4 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 languageEnglish (US)
Pages (from-to)4123-4166
Number of pages44
JournalReview of Financial Studies
Volume24
Issue number12
DOIs
StatePublished - Dec 1 2011

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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