Assessing the effects of unconventional monetary policy on pension funds risk incentives

Boubaker, Sabri and Gounopoulos, Dimitrios and Nguyen, Duc Khuong and Paltalidis, Nikos (2015): Assessing the effects of unconventional monetary policy on pension funds risk incentives.

Abstract

US public pension funds deficits remain stubbornly high even though market conditions have improved in the post-crisis period. This article examines the role of lower short- and long-term interest rates imposed by the use of unconventional monetary policy on pension funds risk taking and asset allocation behavior. We quantify the effects of the Zero Lower Bound policy and the launch of unconventional monetary policy measures by using two structural Vector AutoRegression (VAR) models, a Bayesian VAR and a Markov switching-structural VAR. We provide the first comprehensive evidence showing that persistently low interest rates and falling Treasury yields cause a substantial increase in pension funds risk and portfolios beta. Additionally, we document that the severe funding shortfall in many pension schemes is, to a large extent, associated with and prompted by changes in the monetary policy framework.

• Item Type: MPRA Paper
• Language: English
• Keywords: Pension funds; Unconventional monetary policy; Asset allocation; Zero lower bound
• Subjects: E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy; G - Financial Economics > G1 - General Financial Markets > G11 - Portfolio Choice ; Investment Decisions; G - Financial Economics > G2 - Financial Institutions and Services > G23 - Non-bank Financial Institutions ; Financial Instruments ; Institutional Investors

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