Debt De-risking

42 Pages Posted: 12 Jun 2020

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 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

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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