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

Credit supply shocks and household leverage: Evidence from the US banking deregulation

“…In a similar spirit to our paper, Lian et al (2019) conclude that US household investment decisions are characterised by reaching for yield when monetary policy is expansive (low short- 3 In theoretical models of the risk-taking channel of monetary policy, a reduction in the policy rate causes higher risk-taking by financial institutions, resulting in lower risk premia and amplifying the magnitude of the interest rate cut. These models highlight the role of leverage (Adrian and Shin, 2010), funding conditions (Drechsler et al, 2018), and institutional frictions (Acharya and Naqvi, 2019).…”

“…We also show that the link between the low risk asset share and monetary policy changes is more pronounced for mortgage-holders relative to non-holders, indicating the significance of household debt in the transmission of monetary policy. Thus, our household level analysis sheds new light on this important relationship and points towards explanations related to risk attitudes and secure debt holdings, which supplement the experimental analysis of Lian et al (2019).…”

“…Although we have explored two potential mechanisms, namely risk attitudes and mortgage holding, another potential mechanism that could be at work is related to preferences and psychology, reflecting differences in the perception and evaluation of the risk-return trade-offs in different interest rate environments. As Lian et al (2019) point out, reference dependence and salience are key in explaining the stronger preference for risky assets when interest rates are low. The former implies that individuals experience discomfort when the risk-free interest rate falls below the reference point for investment returns, while the latter emphasizes the role of proportional thinking.…”

Sovereign finance in emerging markets

“…Following the Prospect Theory (Kahneman and Tversky, 1979), I assume they are loss-averse and have reference dependence. I choose this behavioral approach inspired by the recent paper of Lian, Ma and Wang (2018). Until then, most theoretical work on SFY, as Acharya and Naqvi (2016) and Matinez-Miera and Repullo 2017, relied on informational and principal-agent problems to explain SFY.…”

“…Since most evidence comes from intermediated markets, these are reasonable frameworks, because financial institutions might choose higher risks than the final investor wish. However, recent experimental evidence with individual investors (Lian, Ma and Wang, 2018;Ganzach and Wohl, 2018) suggests that SFY exists even in the absence of this type of institutional friction. Additionally, Lian, Ma and Wang (2018) show that SFY by individuals is incompatible with conventional portfolio theory and supply evidence in favor of a theory based on investor psychology.…”