Reach for Yield by U.S. Public Pension Funds
Kenechukwu E. Anadu,
Matthew Pritsker and
Andrei Zlate ()
No RPA 19-2, Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston
This paper studies whether U.S. public pension funds reach for yield by taking more investment risk in a low interest rate environment. To study funds? risk-taking behavior, we first present a simple theoretical model relating risk-taking to the level of risk-free rates, to their underfunding, and to the fiscal condition of their state sponsors. The theory identifies two distinct channels through which interest rates and other factors may affect risk-taking: by altering plans? funding ratios, and by changing risk premia. The theory also shows the effect of state finances on funds? risk-taking depends on incentives to shift risk to state debt holders. To study the determinants of risk-taking empirically, we create a new methodology for inferring funds? risk from limited public information on their annual returns and portfolio weights for the interval 2002-2016. In order to better measure the extent of underfunding, we revalue funds? liabilities using discount rates that better reflect their risk. We find that funds on average took more risk when risk-free rates and funding ratios were lower, which is consistent with both the funding ratio and the risk premia channels. Consistent with risk-shifting, we also find more risk-taking for funds affiliated with state or municipal sponsors with weaker public finances. We estimate that up to one-third of the funds? total risk was related to underfunding and low interest rates at the end of our sample period.
Keywords: underfunding; Value at Risk; state public debt.; U.S. public pension funds; reach for yield; duration-matched discount rates (search for similar items in EconPapers)
JEL-codes: H74 G23 G32 E43 G11 (search for similar items in EconPapers)
Pages: 68 pages
Date: 2019-06-06, Revised 2019-06-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
https://www.bostonfed.org/-/media/Documents/Workingpapers/PDF/2019/sra1902.pdf Full text (application/pdf)
https://www.bostonfed.org/publications/risk-and-po ... c-pension-funds.aspx Full text (text/html)
Working Paper: Reach for Yield by U.S. Public Pension Funds (2019)
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:fip:fedbqu:rpa19-2
Ordering information: This working paper can be ordered from
Access Statistics for this paper
More papers in Supervisory Research and Analysis Working Papers from Federal Reserve Bank of Boston Contact information at EDIRC.
Bibliographic data for series maintained by ().