Working Paper: NBER ID: w27025
Authors: John Y. Campbell; Roman Sigalov
Abstract: We show that reaching for yield -- a tendency to take more risk when the real interest rate declines while the risk premium remains constant -- results from imposing a sustainable spending constraint on an otherwise standard infinitely lived investor with power utility. When the interest rate is initially low, reaching for yield intensifies. The sustainable spending constraint also affects the response of risktaking to a change in the risk premium, which can even change sign. In a variant of the model where the sustainable spending constraint is formulated in nominal terms, low inflation also encourages risktaking.
Keywords: Sustainable Spending; Portfolio Choice; Reaching for Yield
JEL Codes: E43; G11
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lower real interest rate (E43) | Increase in risk-taking (G40) |
| Sustainable spending constraint (D10) | Modify response of risk-taking to changes in risk premium (D91) |
| Real interest rate (E43) | Intensify reaching for yield (G19) |
| Low interest rates (E43) | Change sign of risk-taking response (D91) |