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Servaas van Bilsen, Ilja A Boelaars, A. Lans Bovenberg, The Duration Puzzle in Life-Cycle Investment, Review of Finance, Volume 24, Issue 6, November 2020, Pages 1271–1311, https://doi.org/10.1093/rof/rfaa009
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Abstract
By analyzing the portfolio allocations of target date funds (TDFs), we document that the observed durations of TDF portfolios are inconsistent with the durations predicted by classical portfolio theory. We call this stylized fact the duration puzzle. We investigate to what extent several extensions of classical portfolio theory can explain the duration puzzle. More specifically, we consider the impact of human capital, inflation risk, and portfolio restrictions on the duration of the optimal portfolio. We find that it is difficult to explain the duration puzzle, especially for individuals aged between 35 and 65 years.