“Reaching for yield”
Lian and Ma argue that in an environment of low interest rates investors’ appetite for risk taking increases, a phenomenon called “reaching for yield”. They attribute this behavior to two psychological factors: reference dependence and salience. People form history-dependent reference points of investment returns: when the risk-free rate falls below the reference level, people experience discomfort and become more willing to invest in risky assets to seek higher returns.
Low Interest Rates and Investor Behavior: A Behavioral Perspective
Authors: Chen Lian, Yueran Ma
From: MIT, University of Chicago
The riskiest firms benefited from “reaching for yield”
[W]hile the long period of low interest rates after the financial crisis led to a lower cost of borrowing for U.S. corporations, the higher credit risk premia that accompanied the ultra-low rates did not. [But] while median credit risk premia are higher, the riskiest firms in the sample experienced lower credit risk premia relative to investment grade firms.
How Does Low for Long Impact Credit Risk Premiums?
Authors: Antje Berndt, Jean Helwege
From: Australian National University, University of California–Riverside
Where did investors reach for yield after the financial crisis?
Ivashina and Lerner find that in the ten years following the financial crisis, public and private pension funds allocations into private equity and real estate nearly doubled, representing about 20% of assets under management in 2017 in many of the largest economies. What are the implications on future returns of pensions and what will the consequences of such shift be in a downturn?
Looking for Alternatives: Pension Investments around the World, 2008 to 2017
Authors: Victoria Ivashina, Josh Lerner
From: Harvard University
