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

Boubaker, S.; Gounopoulos, D.; Nguyen, D.K.; Paltalidis, N.

Abstract

This study quantifies the effects of persistently low interest rates near to the zero lower bound and the 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 conducted 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.

Citation

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, 77, 35-52. https://doi.org/10.1016/j.jbankfin.2016.12.007

• Journal Article Type: Article
• Acceptance Date: Dec 13, 2016
• Online Publication Date: Dec 14, 2016
• Publication Date: Apr 1, 2017
• Deposit Date: Dec 19, 2016
• Publicly Available Date: Jun 14, 2018
• Journal: Journal of Banking and Finance
• Print ISSN: 0378-4266
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 77
• Pages: 35-52
• DOI: https://doi.org/10.1016/j.jbankfin.2016.12.007
• Public URL: https://durham-repository.worktribe.com/output/1367196