Procyclical Asset Management and Bond Risk Premia

60 Pages Posted: 4 Aug 2020

See all articles by Alexandru Barbu

Alexandru Barbu

INSEAD; London Business School

Christoph Fricke

European Systemic Risk Board; Deutsche Bundesbank

Emanuel Moench

Frankfurt School of Finance and Management

Multiple version iconThere are 3 versions of this paper

Date Written: 2020

Abstract

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

Barbu, Alexandru and Fricke, Christoph and Moench, Emanuel, Procyclical Asset Management and Bond Risk Premia (2020). Deutsche Bundesbank Discussion Paper No. 38/2020, Available at SSRN: https://ssrn.com/abstract=3665129 or http://dx.doi.org/10.2139/ssrn.3665129

Alexandru Barbu (Contact Author)

INSEAD ( email )

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HOME PAGE: http://https://www.insead.edu/faculty-research/faculty/alexandru-barbu

London Business School ( email )

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Christoph Fricke

European Systemic Risk Board ( email )

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Frankfurt am Main, 60314
Germany

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Emanuel Moench

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

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