Asset Allocation and a Low Interest Rate Environment
Abstract: This study analyses the effect of an expansionary monetary policy on risk-taking of investors in Sweden. By studying net money flows to mutual funds in Sweden we aim to provide an explanation to what variables affect investors' asset allocation decisions and how asset allocation changes in a low interest rate environment. We find that the change in short-term interest rate is a significant decisions parameter for investments in some asset classes but that the return on the Swedish stock market is the main determinant for asset allocation among investors in Sweden. Furthermore we find that investors shift their capital towards riskier investments and away from safe money market investments in times of extraordinary low interest rates. We explain this behaviour through a direct effect of low interest rates, in the form of a search for yield, as well as an indirect effect through low interest rates positive effect on the stock market return. Our findings support our thesis that the expansionary monetary policy pursued by the Riksbank causes investors to take on more risk. Further we argue that the Riksbank is currently threatening the stability of the Swedish financial market and caters for the emergence of a new financial crisis.
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