Riding the Yield Curve: Risk Taking Behavior in a Low Interest Rate Environment
IMF Working Papers, March 13, 2020
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- Canonical URL
- Riding the Yield Curve: Risk Taking Behavior in a Low Interest Rate Environment
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Bibliographic details
- Authors: Ralph Chami, Thomas F. Cosimano, Celine Rochon, Julieta Yung
- Published: March 13, 2020
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781513531861.001
Authors and Publication
- By Ralph Chami, Thomas F. Cosimano, Celine Rochon, Julieta Yung
- March 13, 2020
- IMF Working Papers, Working Paper No. 2020/053
- Issue: 053
- DOI: https://doi.org/10.5089/9781513531861.001
- Pages: 26
- Volume: 2020
- Stock No: WPIEA2020053
- ISBN: 9781513531861
- ISSN: 1018-5941
Research question and scope
- Investigates changes in risk taking behavior in a low interest rate environment.
- Focuses on investor hedging strategies against interest rate risk by taking long or short positions on bonds of different maturities.
- Considers implications for capital losses when interest rates increase and investors hold longer-maturity instruments expecting reversion to historical averages.
Methodology
- Estimates a market stochastic discount factor (SDF) that is non-linear and consistent with empirical properties of cashflow valuations identified in the literature.
- Attributes non-linearities in the SDF to hedging strategies of investors exposed to interest rate risk.
Key findings and evidence
- Non-linearities arise from hedging strategies of investors exposed to interest rate risk.
- Capital losses are amplified when interest rates increase and risk averse investors have taken positions on instruments with longer maturity, expecting instead interest rates to revert back to their historical average.
- Investors seek to hedge against interest rate risk by taking long or short positions on bonds of different maturities.
Subjects and keywords
- Subjects: Bonds, Financial institutions, Financial markets, Financial regulation and supervision, Financial services, Market risk, Securities, Securities markets, Yield curve
- Keywords: averse investor; Bonds; expected SDF; Global; hedging strategy; interest rate movement; Interest rate risk; interest-rate risk factors; investment portfolio; investors aversion; low interest rate environment; Market risk; non-linear stochastic discount factor; risk aversion distribution; Securities; Securities markets; term structure model; WP; Yield curve
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Source: IMF Working Paper "Riding the Yield Curve: Risk Taking Behavior in a Low Interest Rate Environment", March 13, 2020.
Content in this bundle
- Working Paper