Procyclical Asset Management and Bond Risk Premia
60 Pages Posted: 4 Aug 2020
Date Written: 2020
Institutional funds have concentrated ownership by a few institutional investors, infrequent outflows and essentially no leverage. Yet using unique granular data on the bond holdings of institutional funds, we show that their trading behavior is strongly procyclical: they actively move into higher yielding, longer duration and lower rated securities in response to lower in-terest rates, and vice versa. Institutional funds' risk-taking increases when interest rates turn negative, particularly in funds with explicit minimum return guarantees. Their trading has large and persistent price impact. We provide evidence that this procyclical behavior is driven by career concerns among institutional fund managers.
Keywords: institutional funds, institutional accounts, procyclical asset management, portfolio rebalancing, price impact, demand pressures, asset price volatility, career concerns
JEL Classification: G11, G23, E43
Suggested Citation: Suggested Citation