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The Hunt for Duration: Not Waving but Drowning?

Dietrich Domanski (), Hyun Song Shin and Vladyslav Sushko ()
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Dietrich Domanski: Bank for International Settlements

IMF Economic Review, 2017, vol. 65, issue 1, 113-153

Abstract: Abstract Long-term interest rates in Europe fell sharply in 2014 to historically low levels. This development is often attributed to yield-chasing in anticipation of quantitative easing by the European Central Bank. We examine how portfolio adjustments by long-term investors aimed at containing duration mismatches may have acted as an amplification mechanism in this process. Declining long-term interest rates tend to widen the negative duration gap between the assets and liabilities of insurers and pension funds, and any attempted rebalancing by increasing asset duration results in further downward pressure on interest rates. Evidence from the German insurance sector is consistent with such an amplification mechanism.

Keywords: E43; G11; G12; G22 (search for similar items in EconPapers)
Date: 2017
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