Precautionary Savings in Stocks and Bonds

by Carolin Pflueger, Emil Siriwardane, and Adi Sunderam

Overview — What drives real interest rates? The question is important because of unusually low interest rates across the developed world. This paper provides new empirical evidence for one broad driver of real interest rates: investors’ time-varying demand for precautionary savings.

Author Abstract

We document a strong and robust relation between the one-year real rate and precautionary savings motives, as measured by the stock market. Our novel proxy for precautionary savings, based on the difference in valuations between low- and high-volatility stocks, explains 37% of variation in the real rate. In addition, the real rate forecasts returns on the low-minus-high volatility portfolio, though it appears unrelated with measures of the quantity of risk. Our results suggest that precautionary savings motives, and thus the real rate, are driven by time-varying attitudes towards risk. We rationalize these findings in a stylized model with segmented investor clienteles and habit formation.

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