Assessing the effects of unconventional monetary policy and low interest rates on pension fund risk incentives |
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| Affiliation: | 1. Champagne School of Management (Group ESC Troyes), Troyes, France;2. Newcastle University Business School, Newcastle University, Newcastle, United Kingdom;3. IPAG Business School, 184 Boulevard Saint-Germain, 75006 Paris, France;4. Durham University Business School, Durham University, Durham, United Kingdom;5. Université Paris-Est, IRG (EA 2354), UPEC, F-94000, Créteil, France;6. International School, Vietnam National University, Hanoi, Vietnam;1. Faculty of Economics and Business Administration, Alexandru Ioan Cuza University of Iasi, 22th Carol I Blvd, 700505, Iasi, Romania;2. Swiss National Bank and CEPR, Postfach, 8022 Zurich, Switzerland;3. Swiss National Bank, Postfach, 8022 Zurich, Switzerland;1. Department of Banking and Finance, Monash Business School, Monash University, Caulfield Campus. PO Box 197, Caulfield East, Victoria 3145, Australia;2. Deceased;3. Centre for Financial Econometrics, Department of Finance, Deakin Business School, Deakin University, Victoria 3125, Australia |
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| Abstract: | This study quantifies the effects of persistently low interest rates near to the zero lower bound and 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 launched 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. |
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