Assessing the Effects of Unconventional Monetary Policy and Low Interest Rates on Pension Fund Risk Incentives

Journal of Banking and Finance, Vol. 77, pp. 35-52, April 2017

59 Pages Posted: 15 Mar 2015 Last revised: 15 Jan 2017

See all articles by Sabri Boubaker

Sabri Boubaker

Ecole de Management de Normandie

Dimitrios Gounopoulos

University of Bath - School of Management

Duc Khuong Nguyen

IPAG Business School

Nikos Paltalidis

Durham University Business School

Date Written: January 14, 2017

Abstract

This study quantifies the effects of persistently low interest rates near to the zero lower bound and the unconventional monetary policy on pension fund risk incentives in the United States. Using two structural vector autoregressive (VAR) models and a counterfactual scenario analysis, the results show that monetary policy shocks, as identified by changes in Treasury yields following changes in the central bank’s target interest rates, lead to a substantial increase in pension funds’ allocation to equity assets. Notably, the shift from bonds to equity securities is greater during the period where the US Federal Reserve conducted unconventional monetary policy measures. Additional findings show a positive correlation between pension fund risk-taking, low interest rates and the decline in Treasury yields across both well-funded and underfunded public pension plans, which is thus consistent with a structural risk-shifting incentive.

Keywords: Pension funds; Unconventional monetary policy; Asset allocation; Interest rates

JEL Classification: G23, E52, G11

Suggested Citation

Boubaker, Sabri and Gounopoulos, Dimitrios and Nguyen, Duc Khuong and Paltalidis, Nikos, Assessing the Effects of Unconventional Monetary Policy and Low Interest Rates on Pension Fund Risk Incentives (January 14, 2017). Journal of Banking and Finance, Vol. 77, pp. 35-52, April 2017, Available at SSRN: https://ssrn.com/abstract=2578119 or http://dx.doi.org/10.2139/ssrn.2578119

Sabri Boubaker

Ecole de Management de Normandie ( email )

9 rue Claude Bloch
Le Havre Cedex, Cedex 4 14052 Caen
France

HOME PAGE: http://https://www.em-normandie.com/en/sabri-boubaker

Dimitrios Gounopoulos

University of Bath - School of Management ( email )

Duc Khuong Nguyen

IPAG Business School ( email )

184 BD Saint Germain
Paris, 75006
France

HOME PAGE: http://www.ipag.fr/en/

Nikos Paltalidis (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, Durham DH1 3LB
United Kingdom

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