Investing in the World of Negative Interest Rates

Student’s Name Gnidenko Viktoriya Master Thesis Title Investing in the world of negative interest rates Faculty Banking Institute Field of Study 38.04.08 Finance and Credit Year of thesis completion 2020 Academic supervisor Kudrin Alexander, PhD in Physical and Mathematical Sciences, Chief Strategist, Managing Director of “Aton” Description of the goal, objectives, and main results The goal of this master thesis is to identify investors’ response to negative interest rates, specifically to find out how the asset-reallocation and associated risk-taking in negative interest rate environment are changing. By conducting this analysis, the author aims to test the following hypothesis: • Negative interest rates force traditionally conservative investors to “reach for yield”, significantly affecting their portfolio allocation and corresponding risk-taking; • In contrast, while interest rates are non-negative, there is no major change in risk-taking. The author explores the topic by completing the following objectives: 1. Reveal historical cases of countries implementing NIRP and reasons behind introducing this policy. 2. Analyze current trends in the behavior of interest rates and the likelihood of them exiting zero-to-negative territory. 3. Develop regression models to see how changes in interest rates affect the portfolio structure and corresponding risk-taking of pension funds in Japan, Europe and the USA. 4. Compare the results among different economies, describe common patterns. 5. Develop out-of-sample forecasts within established models under different scenarios: further decline in interest rates, interest rates remaining the same and increase in interest rates. Upon completion of the research, the author finds out that the initially stated hypotheses are verified. Specifically, pension funds in economies with protracted exposure to NIRP (EU and Japan) have significantly changed their allocation into riskier assets over time (mainly into alternative investments). Meanwhile buy-and-hold investors in the USA, where interest rates are non-negative, do not experience any drastic changes in portfolio-allocation and corresponding risk-taking. Keywords Investments, negative interest rates, NIRP, pension funds, portfolio allocation, risk-taking