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Target Returns and Negative Interest Rates

Author

Listed:
  • D’Hondt, Catherine

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • De Winne, Rudy

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

  • Todorovic, Aleksandar

    (Université catholique de Louvain, LIDAM/LFIN, Belgium)

Abstract

In this paper, we question whether it is the zero interest rate level or the target return that most impacts the risk-taking behavior of individuals when making investment decisions. In our experiment, we assign either a low or a high target return to participants and ask them to make independent investment decisions as the risk-free rate fluctuates around their target return and, for some of them, becomes negative. We find that the prevailing reference point is the target return, regardless of the level of the risk-free rate. This result still holds even when the risk-free rate is negative, suggesting that the target return drives risk-taking more than does a zero interest rate.

Suggested Citation

  • D’Hondt, Catherine & De Winne, Rudy & Todorovic, Aleksandar, 2021. "Target Returns and Negative Interest Rates," LIDAM Discussion Papers LFIN 2021011, Université catholique de Louvain, Louvain Finance (LFIN).
    • Handle: RePEc:ajf:louvlf:2021011
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    References listed on IDEAS

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    More about this item

    Keywords

    Negative interest rates ; Risk-taking ; Target return;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G40 - Financial Economics - - Behavioral Finance - - - General
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth

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