The Hunt for Duration: Not Waving but Drowning?

BIS Working Paper No. 519

52 Pages Posted: 1 Mar 2017  

Dietrich Domanski

Bank for International Settlements (BIS)

Hyun Song Shin

Bank for International Settlements

Vladyslav Sushko

Bank for International Settlements (BIS) - Monetary and Economic Department

Multiple version iconThere are 2 versions of this paper

Date Written: February 1, 2017

Abstract

Long-term interest rates in Europe fell sharply in 2014 to historically low levels. This development is often attributed to yield-chasing in anticipation of quantitative easing by the European Central Bank. We examine how portfolio adjustments by long-term investors aimed at containing duration mismatches may have acted as an amplification mechanism in this process. Declining long-term interest rates tend to widen the negative duration gap between the assets and liabilities of insurers and pension funds, and any attempted rebalancing by increasing asset duration results in further downward pressure on interest rates. Evidence from the German insurance sector is consistent with such an amplification mechanism.

Keywords: Long-Term Yield Compression, Insurance Sector, Liability-Driven Investment, Duration Mismatch

JEL Classification: E43, G11, G12, G22

Suggested Citation

Domanski, Dietrich and Shin, Hyun Song and Sushko, Vladyslav, The Hunt for Duration: Not Waving but Drowning? (February 1, 2017). BIS Working Paper No. 519. Available at SSRN: https://ssrn.com/abstract=2924658

Dietrich Domanski

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Hyun Song Shin

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

HOME PAGE: http://www.bis.org/author/hyun_song_shin.htm

Vladyslav Sushko (Contact Author)

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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