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The Duration Puzzle in Life-Cycle Investment

Author

Listed:
  • Servaas van Bilsen
  • Ilja A Boelaars
  • A. Lans Bovenberg

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.

Suggested Citation

  • Servaas van Bilsen & Ilja A Boelaars & A. Lans Bovenberg, 2020. "The Duration Puzzle in Life-Cycle Investment," Review of Finance, European Finance Association, vol. 24(6), pages 1271-1311.
    • Handle: RePEc:oup:revfin:v:24:y:2020:i:6:p:1271-1311.
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    File URL: http://hdl.handle.net/10.1093/rof/rfaa009
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    Citations

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    Cited by:

    1. Servaas Bilsen & Roel J. Mehlkopf & Stephan Stalborch, 2022. "Intergenerational Transfers in the New Dutch Pension Contract," De Economist, Springer, vol. 170(1), pages 37-67, February.
    2. Mantilla-Garcia, Daniel & Martellini, Lionel & Garcia-Huitrón, Manuel E. & Martinez-Carrasco, Miguel A., 2024. "Back to the funding ratio! Addressing the duration puzzle and retirement income risk of defined contribution pension plans," Journal of Banking & Finance, Elsevier, vol. 159(C).

    More about this item

    Keywords

    Life-cycle investment; Target date funds; Long-term bonds; Interest rate risk management;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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