Procyclical Asset Management and Bond Risk Premia

67 Pages Posted: 27 Mar 2019 Last revised: 5 Mar 2021

See all articles by Alexandru Barbu

Alexandru Barbu

INSEAD

Christoph Fricke

European Systemic Risk Board; Deutsche Bundesbank

Emanuel Moench

Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)

Date Written: February 27, 2021

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 eff ect is particularly pronounced for those off ering 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 accounts,procyclical asset management,portfolio rebalancing,price impact, demand pressures, asset price volatility

JEL Classification: G11, G23, E43

Suggested Citation

Barbu, Alexandru and Fricke, Christoph and Moench, Emanuel, Procyclical Asset Management and Bond Risk Premia (February 27, 2021). Available at SSRN: https://ssrn.com/abstract=3345069 or http://dx.doi.org/10.2139/ssrn.3345069

Alexandru Barbu (Contact Author)

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

HOME PAGE: http://https://www.insead.edu/faculty-research/faculty/alexandru-barbu

Christoph Fricke

European Systemic Risk Board ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Emanuel Moench

Frankfurt School of Finance & Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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