Shedding Light on the Causes for Reaching for Yield Evidence From an Emerging Country

Shedding Light on the Causes for Reaching for Yield Evidence From an Emerging Country

• Author
• Thiago Cyfer Goularte
• Co-authors
• Rodrigo De Losso da Silveira Bueno
• Abstract

• We test the Reach-for-Yield (RFY) phenomenon - agents' greater risk appetite when base interest rates are low - in the Brazilian investment fund market. We find evidence of RFY for fixed-income funds and equity funds, despite the fact that Brazilian interest rates were well above the zero-lower bound during the sample period. We also test empirically four of the latest theoretical explanations for the RFY effect, finding favourable evidence for three of them: (i) a Behavioral Hypothesis in the spirit of Lian, Ma \& Wang (2019) and theories such as Salience (Bordalo, Gennaioli \& Shleifer, 2012); (ii) a Manager Skill Heterogeneity Hypothesis, as in the Guerrieri \& Kondor (2009) model; (ii) a Budget Constraint Hypothesis, based on the sustainable budget constraint of the Campbell \& Sigalov (2022) model. These hypothesis are not mutually exclusive, indicating that a model that integrates both explanations for RFY may be a good venue for future research. To the best of our knowledge, this is the first paper to empirically test different theoretical explanations for the RFY, and also the first one to find direct evidence of this effect in an emergent economy.

   

• Keywords
• Risk-Attitude; Investment Funds; Reach-for-Yield
• Subject Area
• Asset pricing, investments, and Derivatives

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