The Investment Behavior of Institutional Accounts
61 Pages Posted: 27 Mar 2019
Date Written: March 3, 2019
This paper uses novel proprietary data on the securities holdings of institutional accounts to document two stylised facts: First, institutional accounts’ trading behavior is strongly procyclical: they actively tilt their portfolios towards higher yielding, longer duration and lower rated securities in response to compressions in term and credit spreads; they are more responsive to changes in the term spread than credit spreads, and appear to respond to changes in rate expectations, but not term premia. Second, institutional accounts have price impact. Using demand variation within pairs of observationally equivalent bonds, we find that the trades of institutional accounts move prices away from fundamentals, demand liquidity, and create excess volatility. We provide evidence for both implicit and explicit incentives that could rationalise this behavior.
Keywords: Institutional accounts,procyclical asset management,portfolio rebalancing,price impact, demand pressures, asset price volatility
JEL Classification: G11, G23, E43
Suggested Citation: Suggested Citation