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Risk Aversion & Asset Allocation in a Low Repo Rate Climate

Clarin, Christoffer LU and Ekman, Gabriel LU (2017) NEKH02 20162
Department of Economics
Abstract
This paper addresses the issue of risk aversion and asset allocation for investors under the current globally low repo rate climate, as we try to examine how the low rate affects investor decisions. As a proxy for investors we have sampled data from several mutual funds, consisting of 50 balanced mutual funds and 15 pension targeting funds, all registered in the United States. Our measures of reallocation within the funds are the beta-values and risk is measured through the funds variance. According to our hypothesis a low repo rate should affect the risk-free asset, lowering its yield. Investors on the market will therefore be inclined to reallocate their portfolios towards the market and away from the risk-free asset, thus taking on more... (More)
This paper addresses the issue of risk aversion and asset allocation for investors under the current globally low repo rate climate, as we try to examine how the low rate affects investor decisions. As a proxy for investors we have sampled data from several mutual funds, consisting of 50 balanced mutual funds and 15 pension targeting funds, all registered in the United States. Our measures of reallocation within the funds are the beta-values and risk is measured through the funds variance. According to our hypothesis a low repo rate should affect the risk-free asset, lowering its yield. Investors on the market will therefore be inclined to reallocate their portfolios towards the market and away from the risk-free asset, thus taking on more risk. The hypothesis and reasoning in this paper is based on Markowitz assumptions of investors which are risk-averse and mean-variance optimizers, as well as the assumptions of Capital Asset Pricing Model that all investors act homogenous and facing the same risky portfolio and risk-free asset. The result of this paper indicates that a shift within investors risk aversion and asset allocation have occurred, but in a somewhat inconclusive way. The shift seems to depend on the funds' risk aversion and their willingness to change it when exposed to an increased market variance rather than as a direct response to a low risk-free rate. Rendering in the conclusion that the low repo rate affects risk aversion and asset allocation mostly through an increased variance. (Less)
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author
Clarin, Christoffer LU and Ekman, Gabriel LU
supervisor
organization
course
NEKH02 20162
year
type
M2 - Bachelor Degree
subject
keywords
Repo Rate, Asset allocation, Risk aversion
language
English
id
8898928
date added to LUP
2017-02-10 13:46:21
date last changed
2017-02-10 13:46:21
@misc{8898928,
  abstract     = {This paper addresses the issue of risk aversion and asset allocation for investors under the current globally low repo rate climate, as we try to examine how the low rate affects investor decisions. As a proxy for investors we have sampled data from several mutual funds, consisting of 50 balanced mutual funds and 15 pension targeting funds, all registered in the United States. Our measures of reallocation within the funds are the beta-values and risk is measured through the funds variance. According to our hypothesis a low repo rate should affect the risk-free asset, lowering its yield. Investors on the market will therefore be inclined to reallocate their portfolios towards the market and away from the risk-free asset, thus taking on more risk. The hypothesis and reasoning in this paper is based on Markowitz assumptions of investors which are risk-averse and mean-variance optimizers, as well as the assumptions of Capital Asset Pricing Model that all investors act homogenous and facing the same risky portfolio and risk-free asset. The result of this paper indicates that a shift within investors risk aversion and asset allocation have occurred, but in a somewhat inconclusive way. The shift seems to depend on the funds' risk aversion and their willingness to change it when exposed to an increased market variance rather than as a direct response to a low risk-free rate. Rendering in the conclusion that the low repo rate affects risk aversion and asset allocation mostly through an increased variance.},
  author       = {Clarin, Christoffer and Ekman, Gabriel},
  keyword      = {Repo Rate,Asset allocation,Risk aversion},
  language     = {eng},
  note         = {Student Paper},
  title        = {Risk Aversion & Asset Allocation in a Low Repo Rate Climate},
  year         = {2017},
}