Low Interest Rates and Risk Taking: Evidence from Individual Investment Decisions
Review of Financial Studies
49 Pages Posted: 14 Jul 2016 Last revised: 29 Aug 2018
Date Written: August 22, 2018
How do low interest rates affect investor behavior? We demonstrate that individuals “reach for yield,” that is, have a greater appetite for risk taking when interest rates are low. Using randomized investment experiments holding fixed risk premia and risks, we show low interest rates lead to significantly higher allocations to risky assets among diverse populations. The behavior is not easily explained by conventional portfolio choice theory or institutional frictions. We then propose and provide evidence for mechanisms related to investor psychology, including reference dependence and salience. We also present results using observational 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