Monetary Policy and Reaching for Income
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.
We thank Bo Becker (discussant), Paul Tetlock, Terrance Odean, Michaela Pagel, Julian Thimme (discussant), Annette Vissing-Jorgensen (discussant), Boris Vallee, Jeffrey Wurgler (discussant), David Solomon, Michael Weber (discussant), and participants in the NBER Behavioral Finance Meeting, the Duke/UNC Asset Pricing Conference, SFS Cavalcade, LBS Summer Symposium, the HEC-McGill Winter Finance Workshop, EFA 2018 Meetings, and the Rising Five-Star Workshop for helpful comments and discussions. We thank Adrien Alvero and Antony Anyosa for excellent research assistance. We also thank Terrance Odean for sharing the individual investor data. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
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