Of course, it is arguable that the search for yield in riskier assets is due in part, no doubt, to the historically low interest rates and abundant global liquidity, partly a result of recent expansionary monetary policy around the world. This has encouraged greater risk-taking, resulting in a substantial reduction in risk and liquidity premia over the entire maturity spectrum. On the other hand, however, low risk premia could also reflect changing risk appetite. More importantly, it is unclear whether this change in risk appetite has arisen from permanent or transitory factors. I make this distinction because permanent factors would imply that this reduction in risk premia is here to stay. Transitory factors, on the other hand, imply that the risk premia would rise once these factors reversed. Let me try to identify some of the permanent factors that have resulted in the shift in risk appetite and preferences. These include, firstly, changing demographics. The aging population has led to a larger volume of pension funds, which need to seek higher returns in emerging market assets. Secondly, technological advances, such as the IT revolution and decline in costs of telecommunications and transportation, have substantially lowered costs for cross-border financial transactions. Thirdly, changes in exchange rate regimes and capital account liberalization over the years have lifted many of the previous obstacles to crossborder financial transactions. Fourthly, financial innovation has made credit risk transfer mechanisms more widely available, increasing the appeal of riskier assets.
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