Debt De-Risking

45 Pages Posted: 3 Jun 2020 Last revised: 16 Aug 2020

See all articles by Gianpaolo Parise

Gianpaolo Parise

EDHEC Business School and CEPR

Andreas Schrimpf

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

Multiple version iconThere are 2 versions of this paper

Date Written: July 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: bonds, De-risking, liquidity, Mutual funds, swing pricing, tournaments

JEL Classification: E43, G11, G23, G32

Suggested Citation

Parise, Gianpaolo and Schrimpf, Andreas, Debt De-Risking (July 2020). CEPR Discussion Paper No. DP14817, Available at SSRN: https://ssrn.com/abstract=3615580

Gianpaolo Parise (Contact Author)

EDHEC Business School and CEPR ( email )

393 Promenade des Anglais
Nice, 06200
France

Andreas Schrimpf

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

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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