Working Paper: CEPR ID: DP15123
Authors: Alexandru Barbu; Christoph Fricke; Emanuel Moench
Abstract: We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers.
Keywords: institutional funds; institutional accounts; procyclical asset management; portfolio rebalancing; price impact; demand pressures; asset price volatility; career concerns
JEL Codes: G11; G23; E43
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Institutional fund managers' procyclical trading behaviour (G41) | Increased risk-taking (G41) |
| Procyclical trading behaviour (E32) | Increased movement into higher yielding, longer duration, and lower-rated securities (G12) |
| Increased risk-taking (G41) | Dynamics of bond risk premia (E43) |
| Institutional fund demand (G23) | Higher excess returns for bonds (G12) |
| Procyclical trading behaviour (E32) | Price impacts in bond markets (E43) |
| Career concerns among fund managers (G23) | Procyclical trading behaviour (E32) |
| Institutional funds amplify bond price dynamics (G23) | Lasting effect on bond prices (E43) |
| Buying pressures (G19) | Lasting effect on bond prices (E43) |
| Selling pressures (G19) | Quick dissipation of effects on bond prices (E43) |