Monetary Policy and Reaching for Income / Kent Daniel, Lorenzo Garlappi, Kairong Xiao.

Format:

Book

Author/Creator:

Daniel, Kent.

Contributor:

National Bureau of Economic Research.

Garlappi, Lorenzo.

Xiao, Kairong.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25344.

NBER working paper series no. w25344

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

We study the impact of monetary policy on investors' portfolio choices and asset prices. Using data on individual portfolio holdings and on mutual fund flows, we find that a low-interest-rate monetary policy increases investors' demand for high-dividend stocks and drives up their prices. The increase in demand is more pronounced among investors who fund consumption using dividend income. To explain these empirical findings, we develop an asset pricing model in which investors have quasi-hyperbolic time preferences and use dividend income as a commitment device to curb their tendency to over-consume. When accommodative monetary policy lowers interest rates, it reduces the income stream from bonds and induces investors who want to keep a desired level of consumption to "reach for income'' by tilting their portfolio toward high-dividend stocks. Our finding suggests that low-interest-rate monetary policy may influence the risk premium of income-generating assets, lead to under-diversification of investors' portfolios, and cause redistributive effects across firms that differ in their dividend policy.

Notes:

Print version record

December 2018.