Macro-economic Risk

The Global Risk Institute funded this research along with the preparation of this paper.

Characteristics of Fixed Income Holdings of U.S. and Canadian Institutions in Low Interest Rate Periods


Related Project: Optimal and Actual Asset Allocation Decisions in Protracted Low Interest Rate Periods

The authors are independent contributors to the Global Risk Institute. They are solely responsible for the content of the article.

The persistence of prolonged periods of low interest rates in developed economies such as Canada, the UK and the US has generated a lot of interest in its impact on asset allocation decisions of institutional investors. The issue has experienced intense coverage in business publications and popular press. In a series of studies, we examine this issue empirically. In the first paper, we examined the asset allocation between equity and fixed income of pension funds and insurance companies based in US, UK and Canada. Our results show that in the three countries studied, institutions do not alter their asset allocations in a dramatic manner. There is weak evidence showing that there is a shift towards more equity and less fixed income securities in protracted low interest rate periods. In the second paper, we investigate the impact of changes in the interest rate environment on the holdings of insurance companies in the United States. Overall, our empirical results suggest that US based insurance companies do indeed alter their portfolio holdings of publicly traded equity during protracted periods of low interest rates. Being sensitive to the drop in yields of their fixed income holdings, they prefer higher income yielding assets. Further, from a risk management perspective they prefer higher diversification but increase the systematic risk of their portfolios in order to earn higher returns. In the current paper, we examine the shifts in fixed income allocations during low periods based on three fundamental bond characteristics – risk, maturity and liquidity.

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