Debt De-risking

54 Pages Posted: 12 Jun 2020 Last revised: 5 Mar 2021

See all articles by Gianpaolo Parise

Gianpaolo Parise

EDHEC Business School and CEPR

Jannic Cutura

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department

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Date Written: May 19, 2020

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 tournament in which laggard funds actively de-risk their portfolios, trading off yield for liquidity. Precautionary de-risking is reinforced by a more concave flow-to-performance sensitivity and by periods of market stress, whereas it is weakened by low interest rates. We provide evidence that de-risking is effective in reducing ex post liquidation costs by mitigating the feedback loop between bond and fund liquidity. Flexible NAVs (swing pricing) may, however, dissuade de-risking and reintroduce moral hazard.

Keywords: Bond mutual funds, liquidity, tournaments, risk, swing pricing

JEL Classification: G11, G23, G32, E43

Suggested Citation

Parise, Gianpaolo and Cutura, Jannic and Schrimpf, Andreas, Debt De-risking (May 19, 2020). Available at SSRN: https://ssrn.com/abstract=3604889 or http://dx.doi.org/10.2139/ssrn.3604889

Gianpaolo Parise (Contact Author)

EDHEC Business School and CEPR ( email )

393 Promenade des Anglais
Nice, 06200
France

Jannic Cutura

Goethe University Frankfurt, House of Finance (HoF), Graduate School of Economics, Finance and Management (GSEFM), Students ( email )

Grüneburgplatz 1
Frankfurt
Germany

Andreas Schrimpf

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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