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

Sabri Boubaker, Dimitrios Gounopoulos, Duc Nguyen, Nikos Paltalidis

Research output: Contribution to journal › Article

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Abstract

In this article the role of unconventional monetary policy and low interest rates are amplified as one of a series of components of possible explanations on US pension funds risk taking and asset allocation behavior. We quantify the effects of persistently low interest rates near to the zero lower bound, and the unconventional monetary policy adopted by the Federal Reserve by using counterfactual scenarios and two structural Vector AutoRegressive (VAR) models. We provide the first comprehensive evidence showing that monetary policy shocks, identified as changes in interest rates that lead to larger or smaller changes in Treasury yields, are followed by a substantial increase in equity assets. The shift from Treasury bonds to equity securities is greater during the unconventional monetary policy period. We document a positive correlation between pension fund risk taking, low interest rates and the decline in Treasury yields across well-funded and underfunded pension plans, which is consistent with a structural risk shifting incentive.
LanguageEnglish
Pages35 - 52
Number of pages18
JournalJournal of Banking and Finance
Volume77
Early online date14 Dec 2016
DOIs
StatusPublished - Apr 2017

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Pension funds
Incentives
Interest rates
Unconventional monetary policy
Risk taking
Equity
Asset allocation
Pension plans
Vector autoregressive model
Federal Reserve
Risk-shifting
Assets
Monetary policy shocks
Zero lower bound
Scenarios
Treasury bonds

Cite this

Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives. / Boubaker, Sabri; Gounopoulos, Dimitrios; Nguyen, Duc; Paltalidis, Nikos.

In: Journal of Banking and Finance, Vol. 77, 04.2017, p. 35 - 52.

Research output: Contribution to journal › Article

Boubaker, S, Gounopoulos, D, Nguyen, D & Paltalidis, N 2017, 'Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives' Journal of Banking and Finance, vol. 77, pp. 35 - 52. https://doi.org/10.1016/j.jbankfin.2016.12.007
Boubaker S, Gounopoulos D, Nguyen D, Paltalidis N. Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives. Journal of Banking and Finance. 2017 Apr;77:35 - 52. https://doi.org/10.1016/j.jbankfin.2016.12.007
Boubaker, Sabri ; Gounopoulos, Dimitrios ; Nguyen, Duc ; Paltalidis, Nikos. / Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives. In: Journal of Banking and Finance. 2017 ; Vol. 77. pp. 35 - 52.
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