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| Type | Working Paper |
| Scope | Discipline-based scholarship |
| Title | Bond ladders and optimal portfolios |
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| Authors |
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| Language |
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| Institution | University of Zurich |
| Series Name | Swiss Finance Institute Research Paper Series |
| Number | 12 |
| Number of Pages | 38 |
| Date | 2009 |
| Abstract Text | Many bond portfolio managers argue that bond laddering tends to outperform other bond investment strategies because it reduces both market price risk and reinvestment risk for a bond portfolio in the presence of interest rate uncertainty. Despite the popularity of bond ladders as a strategy for managing investments in fixed-income securities, there is surprising little reference to this subject in the economics and finance literature. In this paper we analyze complex bond portfolios within the framework of a dynamic general equilibrium asset-pricing model. Equilibrium bond portfolios are nonsensical, implying a trading volume that vastly exceeds observed trading volume on ¯nancial markets. Such portfolios would also be very costly and thus suboptimal in the presence of even very small transaction costs. Instead portfolios combining bond ladders with a market portfolio of equity assets are nearly optimal investment strategies, which in addition would minimize transaction costs. This paper, therefore, provides a rationale for bond ladders as a popular bond investment strategy. |
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| Other Identification Number | merlin-id:3696 |
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