Optimal Portfolio Choice Between Long-term and Short-term Government Bonds by Zejun Jiang

Join us for this weeks Macroeconomics Research Seminar, Autumn Term 2024.

Zejun Jiang, from West Virginia University, will present this weeks Macroeconomics seminar on Optimal Portfolio Choice Between Long-term and Short-term Government Bonds.

Abstract

This paper investigates the optimal demand for government bonds of different maturities. Traditionally, short-term government bonds are incorporated into economic models to analyze intertemporal optimization and monetary policy transmission. However, prior research has questioned the assumption of perfect substitution between short- and long-term bonds, with U.S. Treasury data showing a preference for long-term bonds. To explore maturity preferences, this study develops an intertemporal portfolio choice model with labor income uncertainty. Analytical solutions decompose demand into two components: myopic demand, driven by the expected excess return on long-term bonds, and hedging demand, primarily shaped by labor income risk, highlighting the significant role of labor markets in household portfolio decisions. Calibration results reveal that model solutions effectively capture the long-run dynamics of bond allocations, with inflation being the dominant factor. Lastly, using money demand theory as an example, this article briefly demonstrates how optimal bond demand can deepen our understanding of broader macroeconomic issues.

  
This seminar will be held via zoom at 1.30pm on Tuesday 12 October 2024. This event is open to all levels of study and is also open to the public. To register your place, please contact the seminar organisers.

This event is part of the Macroeconomics Research Seminar Series.