Pension Liquidity Risk
75 Pages Posted: 17 Feb 2024
There are 2 versions of this paper
Pension Liquidity Risk
Pension Liquidity Risk
Date Written: February 14, 2024
Abstract
Pension funds rely on interest rate swaps to hedge the interest rate risk arising from their liabilities. Analyzing unique data on Dutch pension funds, we show that this hedging behavior exposes pension funds to liquidity risk due to margin calls, which can be as large as 15% of their total assets. Our analysis uncovers three key findings: (i) pension funds with tighter regulatory constraints use swaps more aggressively; (ii) in response to rising interest rates, triggering margin calls, pension funds predominantly sell safe and short-term government bonds; (iii) we demonstrate that 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: Suggested Citation