Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions
48 Pages Posted: 14 Jul 2016 Last revised: 19 Jul 2017
Date Written: July 18, 2017
In recent years, interest rates reached historic lows in many countries. We document that individual investors "reach for yield," that is, have a greater appetite for risk taking when interest rates are low. Using an investment experiment holding fixed risk premia and risks, we show that low interest rates lead to significantly higher allocations to risky assets, among MTurk subjects and HBS MBAs. This behavior cannot be easily explained by conventional portfolio choice theory or by institutional frictions. We then propose and test explanations related to investor psychology. We also present complementary evidence using historical data on household investment decisions.
Keywords: Low interest rates, risk taking, investment experiment, reference dependence, salience
JEL Classification: D14, E44, E52, G11, G40
Suggested Citation: Suggested Citation