Working Paper: NBER ID: w25344
Authors: Kent Daniel; Lorenzo Garlappi; Kairong Xiao
Abstract: We study the impact of monetary policy on investors' portfolio choices and asset prices. Using data on individual portfolio holdings and on mutual fund flows, we find that a low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up their prices. The increase in demand is more pronounced among investors who fund consumption using dividend income. To explain these empirical findings, we develop an asset pricing model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to over-consume. When accommodative monetary policy lowers interest rates, it reduces the income stream from bonds and induces investors who want to keep a desired level of consumption to "reach for income'' by tilting their portfolio toward high-dividend stocks. Our finding suggests that low-interest-rate monetary policy may influence the risk premium of income-generating assets, lead to under-diversification of investors' portfolios, and cause redistributive effects across firms that differ in their dividend policy.
Keywords: Monetary Policy; Dividend Stocks; Investor Behavior; Behavioral Finance
JEL Codes: E50; G11; G4
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fed funds rate decrease (E52) | reduction in interest income from deposits and bonds (E43) |
| reduction in interest income from deposits and bonds (E43) | increase in demand for high-dividend stocks (G35) |
| fed funds rate decrease (E52) | increase in assets under management in high-income mutual funds (G23) |
| low interest rates (E43) | influence on risk premium of income-generating assets (G19) |
| low interest rates (E43) | under-diversification and redistributive effects across firms with different dividend policies (G35) |
| monetary policy interaction with demographic variables (J19) | differential effect among retirees (J26) |
| low interest rates (E43) | reaching-for-income phenomenon (E25) |
| reaching-for-income phenomenon (E25) | under-diversification and redistributive effects (H23) |
| fed funds rate decrease (E52) | demand for high-dividend stocks (G35) |
| fed funds rate decrease (E52) | holdings of high-dividend stocks (G35) |