Financial Intermediaries and Demand for Duration

69 Pages Posted: 19 Oct 2023 Last revised: 15 Aug 2024

See all articles by Alberto Plazzi

Alberto Plazzi

Universita' della Svizzera italiana; Swiss Finance Institute

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Marco Zanotti

USI Lugano; Swiss Finance Institute

Date Written: October 17, 2023

Abstract

We investigate intermediaries demand for long-term cash flows by estimating a characteristic-based demand system on the equity holdings of primary dealers, pension funds, banks, and insurance companies. Institutions’ demand for equity duration varies over time and in the cross-section as a function of measures of capital availability. In the time-series, when financial constraints are tight, institutions curtail their demand for long-term claims and become more exposed to reinvestment risk. In the cross-section, unconstrained institutions tilt their portfolio more strongly toward long-duration stocks compared to their constrained peers. We conclude that institutional constraints impair the ability to seek for the hedging properties of long duration claims, to the point that institutions may be forced to leave their “preferred-habitat” allocation. Counterfactual analysis shows that shifts in preference for duration generate sizeable effects in the cross-section of stocks, with a stronger impact on firms with long-term cash flows such as high ESG-rated companies.

Keywords: Institutional demand, Equity duration, Long-term investors, Capital constraints

JEL Classification: G10, G11, G20

Suggested Citation

Plazzi, Alberto and Tamoni, Andrea and Zanotti, Marco, Financial Intermediaries and Demand for Duration (October 17, 2023). Swiss Finance Institute Research Paper No. 23-94, Available at SSRN: https://ssrn.com/abstract=4605046 or http://dx.doi.org/10.2139/ssrn.4605046

Alberto Plazzi (Contact Author)

Universita' della Svizzera italiana ( email )

Via Buffi 13
CH-6900 Lugano
Switzerland

HOME PAGE: http://usi.to/mpy

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Andrea Tamoni

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

1 Washington Park
Newark, NJ 07102
United States

Marco Zanotti

USI Lugano ( email )

Lugano
Switzerland

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

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