Collateral Pledgeability and Asset Manager Portfolio Choices During Redemption Waves

58 Pages Posted: 17 Apr 2024

See all articles by Thiago A. Fauvrelle

Thiago A. Fauvrelle

European Stability Mechanism

Max Riedel

Leibniz Institute for Financial Research SAFE

Mathias Skrutkowski

European Stability Mechanism

Multiple version iconThere are 2 versions of this paper

Date Written: April 16, 2024

Abstract

This paper studies whether Eurosystem collateral eligibility played a role in the portfolio choices of euro area asset managers during the “dash-for-cash” episode of 2020. We find that asset managers reduced their allocation to ECB-eligible corporate bonds, selling them in order to finance redemptions, while simultaneously increasing their cash holdings. These findings add nuance to previous studies of liquidity strains and price dislocations in the corporate bond market during the onset of the Covid-19 pandemic, indicating a greater willingness of dealers to increase their inventories of corporate bonds pledgeable with the ECB. Analysing the price impact of these portfolio choices, we also find evidence pointing to price pressure for both ECB-eligible and ineligible corporate bonds. Bonds that were held to a larger extent by investment funds in our sample experienced higher price pressure, although the impact was lower for ECB-eligible bonds. We also discuss broader implications for the related policy debate about how central banks could mitigate similar types of liquidity shocks.

Keywords: Investment funds, dash-for-cash, corporate bonds, Eurosystem collateral eligibility

JEL Classification: G11, G23

Suggested Citation

Fauvrelle, Thiago and Riedel, Max and Skrutkowski, Mathias, Collateral Pledgeability and Asset Manager Portfolio Choices During Redemption Waves (April 16, 2024). SAFE Working Paper No. 417, Available at SSRN: https://ssrn.com/abstract=4795971 or http://dx.doi.org/10.2139/ssrn.4795971

Thiago Fauvrelle

European Stability Mechanism ( email )

6a Circuit de la Foire Internationale
L-1347
Luxembourg

Max Riedel (Contact Author)

Leibniz Institute for Financial Research SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

Mathias Skrutkowski

European Stability Mechanism ( email )

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
30
Abstract Views
151
PlumX Metrics