Debt De-risking

54 Pages Posted: 12 Jun 2020 Last revised: 27 Sep 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; CREATES - Aarhus University

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Date Written: May 19, 2020

Abstract

We examine how corporate bond fund managers manipulate portfolio risk in response to incentives. We find that liquidity risk concerns drive the allocation decisions of underperforming funds, whereas tournament incentives are of secondary importance. This leads laggard fund managers to trade off yield for liquidity, while holding the exposure to other sources of risk constant. The documented de-risking is stronger for managers with shorter tenure and is reinforced by a more concave flow-to-performance sensitivity and by periods of market stress. De-risking meaningfully reduces ex post liquidation costs. Flexible NAVs (swing pricing) may, however, reduce de-risking incentives and create 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 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

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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