The existing literature has documented “reaching for yield”—the phenomenon of investing more in risky assets when interest rates are lower—among institutional investors. Using detailed transaction data from a large brokerage firm, we provide direct field evidence that reach for yield is also present in the trading behavior of individual investors. We further document significant heterogeneity in these responses as predicted by different theories. Consistent with models of portfolio choice with labor income, reaching for yield is more pronounced among younger and less wealthy individuals. Consistent with prospect theory, reaching for yield is more pronounced when investors are trading at a loss. Finally, we discuss the phenomenon of “reverse reaching for yield” and document such behavior among certain investor subgroups.
Financial Markets Group Discussion Papers DP 887