Frank Eich and Jumana Saleheen.
Despite the fact that the financial crisis erupted nearly a decade ago, its legacy is still being felt today. Disappointingly weak growth and low interest rates are arguably part of that legacy (though other developments also matter), and policy makers are increasingly worried that these are no longer temporary phenomena but instead have become permanent features. This blog assesses what a prolonged period of weak growth and low interest rates (sometimes also referred to by “secular stagnation” or “low for long”) might mean for the viability of defined-benefit (DB) occupational pension schemes in the UK and what financial stability risks might arise as a result of a changing business environment.
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Rational and behavioural factors can coexist in financial markets. The ‘search for yield’ (or ‘reach for yield’) observed in financial markets in recent years is a striking manifestation of the interaction of rational and behavioural factors. During an extended period of low interest rates and volatility, market participants have displayed a tendency to seek higher returns by investing in securities that carry higher credit, liquidity or duration risk. This tendency to search for yield appears to have been motivated by a mix of rational fundamental considerations, business and regulatory constraints, and behavioural biases.
Continue reading “Rational and Behavioural Drivers of Financial Markets: the case of ‘search for yield’”