Working Paper: CEPR ID: DP14817
Authors: Jannic Cutura; Gianpaolo Parise; Andreas Schrimpf
Abstract: We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.
Keywords: derisking; mutual funds; bonds; liquidity; swing pricing; tournaments
JEL Codes: G11; G23; G32; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| competitive pressure (L11) | risk manipulation behavior of corporate bond fund managers (G34) |
| laggard funds (G23) | derisk their portfolios (G11) |
| sensitivity of investor flows to performance (G11) | risk-taking behavior of laggard funds (G41) |
| market conditions (P42) | incentives of fund managers to derisk (G11) |
| swing pricing (G13) | risk-taking among underperforming funds (G11) |