The hunt for duration: not waving but drowning?

Dietrich Domanski, Hyun Song Shin and Vladyslav Sushko

No 519, BIS Working Papers from Bank for International Settlements

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 (QE) by the European Central Bank (ECB). 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: long-term yield compression; insurance sector; liability-driven investment; duration mismatch (search for similar items in EconPapers)
Pages: 48 pages
Date: 2015-10
New Economics Papers: this item is included in nep-ias
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Citations: View citations in EconPapers (30)

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Related works:
Journal Article: The Hunt for Duration: Not Waving but Drowning? (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:519

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