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Financial fragilities and risk-taking of corporate bond funds in the aftermath of central bank policy interventions

Author

Listed:
  • Nicola Branzoli

    (Bank of Italy)

  • Raffaele Gallo

    (Bank of Italy)

  • Antonio Ilari

    (Bank of Italy)

  • Dario Portioli

    (Bank of Italy)

Abstract

This paper provides evidence that, by restoring market functioning, central banks' pandemic-related asset purchase programmes lowered payoff complementarities among investors in corporate bond funds, reinforcing asset managers' willingness to hold riskier assets to increase funds' returns. Controlling for potentially confounding factors, we show that funds more exposed to these interventions – i.e. those which immediately prior to the pandemic crisis held a high share of securities eligible for inclusion in purchase programmes – took on more credit and liquidity risks than less exposed ones. Risk-taking was stronger when more exposed funds under-performed their peers or held less liquid assets. We discuss the implications for the design of policy interventions in the aftermath of market stress and the regulation of the investment fund sector.

Suggested Citation

  • Nicola Branzoli & Raffaele Gallo & Antonio Ilari & Dario Portioli, 2023. "Financial fragilities and risk-taking of corporate bond funds in the aftermath of central bank policy interventions," Temi di discussione (Economic working papers) 1404, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_1404_23
    as

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    File URL: https://www.bancaditalia.it/pubblicazioni/temi-discussione/2023/2023-1404/en_tema_1404.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate bond funds; market stress; asset purchase programmes; risk-taking;
    All these keywords.

    JEL classification:

    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • G01 - Financial Economics - - General - - - Financial Crises
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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