RISK-FREE RATES AND ANIMAL SPIRITS IN FINANCIAL MARKETS

Jukka Ilomäki

Annals of Financial Economics (AFE), 2016, vol. 11, issue 03, 1-18

Abstract: We show analytically that animal spirit excess profits for uninformed investors fall (increase) when the risk-free rate rises (falls). In the theoretical analysis, we examine the expected returns of risk-averse, short-lived investors. In addition, we find empirically that the local risk-free rates explain 14% of the changes in the animal spirit excess profits in the global stock markets for the last 29 years when the animal spirits is characterized as a product of the trend-chasing rule.

Keywords: Interest rates; Portfolio choice; stock returns (search for similar items in EconPapers)
Date: 2016
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DOI: 10.1142/S2010495216500111

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