Abstract

https://ssrn.com/abstract=2809191
 


 



Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions


Chen Lian


Massachusetts Institute of Technology (MIT)

Yueran Ma


Harvard University

Carmen Wang


Harvard University - Department of Economics; HBS Negotiations, Organizations and Markets Unit

October 24, 2016


Abstract:     
In recent years, many central banks have set benchmark interest rates to historic lows. In this paper, we provide evidence that individual investors "reach for yield", that is, have a greater appetite for risk taking in such low interest rate environment. We first document this phenomenon in a simple investment experiment, where investment risks and risk premia are held constant. We find significantly higher allocations to risky assets in the low rate condition, among MTurks as well as HBS MBAs. This reaching for yield behavior is unrelated to institutional frictions, and cannot be easily explained by conventional portfolio choice theory. We then propose and provide evidence for two sets of explanations related to people's preferences and psychology. We also present complementary evidence using historical data on individual investors' portfolio allocations and household investment flows.

Number of Pages in PDF File: 49

Keywords: Low interest rates; risk taking; financial stability; individual investment decisions

JEL Classification: E03, E43, E44, E52, E58, G02, G11


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Date posted: July 14, 2016 ; Last revised: October 26, 2016

Suggested Citation

Lian, Chen and Ma, Yueran and Wang, Carmen, Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions (October 24, 2016). Available at SSRN: https://ssrn.com/abstract=2809191 or http://dx.doi.org/10.2139/ssrn.2809191

Contact Information

Chen Lian
Massachusetts Institute of Technology (MIT) ( email )
77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States
Yueran Ma (Contact Author)
Harvard University ( email )
1875 Cambridge Street
Cambridge, MA 02138
United States
Carmen Wang
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
HBS Negotiations, Organizations and Markets Unit ( email )
Soldiers Field
Boston, MA 02163
United States
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