Finance Papers

Document Type

Journal Article

Date of this Version

2003

Publication Source

Journal of Economic Theory

Volume

112

Issue

2

Start Page

325

Last Page

333

DOI

10.1016/S0022-0531(03)00062-0

Abstract

As risk aversion approaches infinity, the portfolio of an investor with utility over consumption at time T is shown to converge to the portfolio consisting entirely of a bond maturing at time T. Previous work on bond allocation requires a specific model for equities, the term structure, and the investor's utility function. In contrast, the only substantive assumption required for the analysis in this paper is that markets are complete. The result, which holds regardless of the underlying investment opportunities and the utility function, formalizes the “preferred habitat” intuition of Modigliani and Sutch (Amer. Econom. Rev. 56 (1966) 178).

Copyright/Permission Statement

© 2003. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/.

Comments

At the time of publication, author Jessica A. Wachter was affiliated with New York University. Currently, she is a faculty member at the Wharton School at the University of Pennsylvania.

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Date Posted: 27 November 2017

This document has been peer reviewed.