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Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives

Lookup NU author(s): Professor Dimitrios Gounopoulos

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Abstract

© 2016 Elsevier B.V. This study quantifies the effects of persistently low interest rates near to the zero lower bound and unconventional monetary policy on pension fund risk incentives in the United States. Using two structural vector autoregressive (VAR) models and a counterfactual scenario analysis, the results show that monetary policy shocks, as identified by changes in Treasury yields following changes in the central bank's target interest rates, lead to a substantial increase in pension funds’ allocation to equity assets. Notably, the shift from bonds to equity securities is greater during the period where the US Federal Reserve launched unconventional monetary policy measures. Additional findings show a positive correlation between pension fund risk-taking, low interest rates and the decline in Treasury yields across both well-funded and underfunded public pension plans, which is thus consistent with a structural risk-shifting incentive.

Publication metadata

Author(s): Boubaker S, Gounopoulos D, Nguyen DK, Paltalidis N

Publication type: Article

Publication status: Published

Journal: Journal of Banking and Finance

Year: 2017

Volume: 77

Pages: 35-52

Print publication date: 01/04/2017

Online publication date: 14/12/2016

Acceptance date: 13/12/2016

Date deposited: 13/12/2016

ISSN (print): 0378-4266

ISSN (electronic): 1872-6372

Publisher: Elsevier BV

URL: https://doi.org/10.1016/j.jbankfin.2016.12.007

DOI: 10.1016/j.jbankfin.2016.12.007

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