What happens to investment choices when interest rates change? An experimental study

Yaron Lahav and Uri Benzion

The Quarterly Review of Economics and Finance, 2022, vol. 86, issue C, 471-481

Abstract: We study experimentally how subjects react to changes in interest rates. Our participants were asked to divide 1,000 units of currency between two assets – one risky and the other risk-free – in four different settings. We use different treatments to change the risk-free rate while keeping the risk premium constant. We find that risk-free rates affect risk allocation asymmetrically: subjects increase the risky portion in their portfolios in response to a decrease in rates. Still, they do not change their portfolios when rates rise. Furthermore, this asymmetric effect occurs only when interest rates remain constant over a relatively long duration; when they are volatile, their impact on risk allocation is reversed. We provide and test a behavioral explanation for these findings.

Keywords: Experimental finance; Interest rate; Investment decision; Risk allocation (search for similar items in EconPapers)
JEL-codes: C91 D81 D91 G11 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S1062976922001028
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:quaeco:v:86:y:2022:i:c:p:471-481

DOI: 10.1016/j.qref.2022.09.002

Access Statistics for this article

The Quarterly Review of Economics and Finance is currently edited by R. J. Arnould and J. E. Finnerty

More articles in The Quarterly Review of Economics and Finance from Elsevier
Bibliographic data for series maintained by Catherine Liu ().