Pension Liquidity Risk

75 Pages Posted: 17 Feb 2024

See all articles by Kristy Jansen

Kristy Jansen

University of Southern California; De Nederlandsche Bank

Sven Klingler

BI Norwegian Business School

Angelo Ranaldo

University of Basel - Faculty of Business and Economics; Swiss Finance Institute; University of St. Gallen

Patty Duijm

De Nederlandsche Bank

Multiple version iconThere are 2 versions of this paper

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

Jansen, Kristy and Klingler, Sven and Ranaldo, Angelo and Duijm, Patty, Pension Liquidity Risk (February 14, 2024). Swiss Finance Institute Research Paper No. 24-16, Available at SSRN: https://ssrn.com/abstract=4728797 or http://dx.doi.org/10.2139/ssrn.4728797

Kristy Jansen

University of Southern California ( email )

De Nederlandsche Bank ( email )

Sven Klingler

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Angelo Ranaldo (Contact Author)

University of Basel - Faculty of Business and Economics ( email )

Petersplatz 1
Basel, 4001
Switzerland

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

University of St. Gallen ( email )

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

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

Patty Duijm

De Nederlandsche Bank ( email )

PO Box 98
1000 AB Amsterdam
Amsterdam, 1000 AB
Netherlands

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