Pension Liquidity Risk

84 Pages Posted: 25 Jun 2023 Last revised: 14 Apr 2024

See all articles by Kristy A.E. Jansen

Kristy A.E. Jansen

Marshall School of Business - University of Southern California; De Nederlandsche Bank

Sven Klingler

BI Norwegian Business School

Angelo Ranaldo

University of St. Gallen; Swiss Finance Institute

Patty Duijm

De Nederlandsche Bank

Date Written: June 20, 2023

Abstract

Pension funds use interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing regulatory data on Dutch pension funds, we find interest rate hedging exposes pension funds to liquidity risk due to margin calls, which can exceed 15% of their total assets when rates rise. We first trace back swap usage to pension regulation and show pension funds with tighter regulatory constraints use swaps more aggressively. After quantifying margin calls, we show pension funds respond to these margin calls by selling safe and short-term government bonds. This procyclical selling adversely affects the prices of these bonds.

Keywords: pension funds, fixed income, interest rate swaps, liability hedging, liquidity risk, margin calls, price impact

JEL Classification: E43, G12, G18

Suggested Citation

Jansen, Kristy A.E. and Klingler, Sven and Ranaldo, Angelo and Duijm, Patty, Pension Liquidity Risk (June 20, 2023). Available at SSRN: https://ssrn.com/abstract=4485970 or http://dx.doi.org/10.2139/ssrn.4485970

Kristy A.E. Jansen (Contact Author)

Marshall School of Business - University of Southern California

701 Exposition Blvd
Los Angeles, CA 90089
United States

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

Sven Klingler

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Angelo Ranaldo

University of St. Gallen ( email )

School of Finance
Unterer Graben 21
St. Gallen, 9000
Switzerland
+41712247010 (Phone)

HOME PAGE: http://fin-sr.unisg.ch

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland
+41796637711 (Phone)

HOME PAGE: http://www.sfi.ch/de/about-us/news/hsg-faculty-members

Patty Duijm

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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