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

Sabri Boubaker, Dimitrios Gounopoulos, Duc Khuong Nguyen and Nikos Paltalidis

Journal of Banking & Finance, 2017, vol. 77, issue C, 35-52

Abstract: 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.

Keywords: Pension funds; Unconventional monetary policy; Asset allocation; Interest rates (search for similar items in EconPapers)
JEL-codes: E52 G11 G23 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (16)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:77:y:2017:i:c:p:35-52

DOI: 10.1016/j.jbankfin.2016.12.007

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