The Duration Puzzle in Life-Cycle Investment

Abstract By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several ex...

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Bibliographic Details
Published in:	Review of Finance Vol. 24; no. 6; pp. 1271 - 1311
Main Authors:	van Bilsen, Servaas, Boelaars, Ilja A, Bovenberg, A. Lans
Format:	Journal Article
Language:	English
Published:	Oxford University Press 01-11-2020
Subjects:	D52 G11 G13 Interest rate risk management D15 Life-cycle investment Long-term bonds Target date funds C61
Online Access:	Get full text
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Summary:	Abstract By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.
ISSN:	1572-3097 1573-692X 1875-824X
DOI:	10.1093/rof/rfaa009