TY  - JOUR
AU  - Sangvinatsos,Antonios
AU  - Wachter,Jessica A.
TI  - Does the Failure of the Expectations Hypothesis Matter for Long-Term Investors
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10086
PY  - 2003
Y2  - November 2003
UR  - http://www.nber.org/papers/w10086
L1  - http://www.nber.org/papers/w10086.pdf
N1  - Author contact info:
Antonios Sangvinatsos
E-Mail: asangvin@stern.nyu.edu

Jessica Wachter
Department of Finance
2300 SH-DH
The Wharton School
University of Pennsylvania
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-7634
Fax: 215/898-6200
E-Mail: jwachter@wharton.upenn.edu
AB  - We consider the consumption and portfolio choice problem of a long-run investor when the term structure is affine and when the investor has access to nominal bonds and a stock portfolio. In the presence of unhedgeable inflation risk, there exist multiple pricing kernels that produce the same bond prices, but a unique pricing kernel equal to the marginal utility of the investor. We apply our method to a three-factor Gaussian model with a time-varying price of risk that captures the failure of the expectations hypothesis seen in the data. We extend this model to account for time-varying expected inflation, and estimate the model with both inflation and term structure data. The estimates imply that the bond portfolio for the long-run investor looks very different from the portfolio of a mean-variance optimizer. In particular, the desire to hedge changes in term premia generates large hedging demands for long-term bonds.
ER  -