The Time Horizon at Which Investors Will Prefer Equities to Bonds
| Autor: | Andrew Smithers |
|---|---|
| Rok vydání: | 2022 |
| DOI: | 10.1093/oso/9780192847096.003.0012 |
| Popis: | By combining the risk-free return on bonds of different maturities with the minimum likely return on equities at different probabilities we can calculate the time horizon at which investors will prefer equities to bonds. The combination of stable volatility with a near normal distribution of the returns allows the time horizon (T) of investors with different levels of risk aversion to be calculated. The risk aversion that determines this time horizon is that for the marginal supplier of sufficient equity and thus at the high end of the spectrum of individual attitudes. T is thus likely to be considerably longer than if the time horizon was determined by the average willingness to accept risk. Because the probability of any given minimum return on equity rises so quickly with time, T is insensitive to small changes in the yield curve. But corporate leverage is highly sensitive to changes in risk-free twenty-year bond yields, so it responds elastically to changes in the yield curve while investors’ time horizons do not. Changes in leverage thus occur readily in response to changes in the yield curve and accommodate the changes in households’ portfolio preferences without any change occurring in the returns on equity. |
| Databáze: | OpenAIRE |
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