42 Pages Posted: 12 Jun 2020
Date Written: May 19, 2020
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: De-risking, bonds, mutual funds, tournaments, liquidity, swing pricing
JEL Classification: G11, G23, G32, E43
Suggested Citation: Suggested Citation