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Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges

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  • Mr. Michael G. Papaioannou
  • Mr. Joonkyu Park
  • Jukka Pihlman
  • Han van der Hoorn

Abstract

This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.

Suggested Citation

  • Mr. Michael G. Papaioannou & Mr. Joonkyu Park & Jukka Pihlman & Han van der Hoorn, 2013. "Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges," IMF Working Papers 2013/193, International Monetary Fund.
    • Handle: RePEc:imf:imfwpa:2013/193
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    2. Jochen Schanz, 2019. "Reserve management in emerging market economies: trends and challenges," BIS Papers chapters, in: Bank for International Settlements (ed.), Reserve management and FX intervention, volume 104, pages 45-55, Bank for International Settlements.
    3. Stefan Goldbach & Volker Nitsch, 2022. "Covid-19 and Capital Flows: The Responses of Investors to the Responses of Governments," Open Economies Review, Springer, vol. 33(4), pages 751-774, September.
    4. Bank for International Settlements, 2016. "Regulatory change and monetary policy," CGFS Papers, Bank for International Settlements, number 55, October –.
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    6. Mr. Joe Crowley, 2015. "Central and Commercial Bank Balance Sheet Risk Before, During, and After the Global Financial Crisis," IMF Working Papers 2015/047, International Monetary Fund.
    7. Ciarlone, Alessio & Miceli, Valeria, 2016. "Escaping financial crises? Macro evidence from sovereign wealth funds' investment behaviour," Emerging Markets Review, Elsevier, vol. 27(C), pages 169-196.
    8. Dirk W.G.A. Broeders & Damiaan H.J. Chen & Peter A. Minderhoud & C.J. Willem Schudel, 2021. "Pension Funds' Herding," International Journal of Central Banking, International Journal of Central Banking, vol. 17(1), pages 285-330, March.
    9. Cappiello, Lorenzo & Holm-Hadulla, Fédéric & Maddaloni, Angela & Mayordomo, Sergio & Unger, Robert & Arts, Laura & Meme, Nicolas & Asimakopoulos, Ioannis & Migiakis, Petros & Behrens, Caterina & Moura, 2021. "Non-bank financial intermediation in the euro area: implications for monetary policy transmission and key vulnerabilities," Occasional Paper Series 270, European Central Bank.
    10. Blanco Cossio,Fernando Andres & Sachdeva,Niharika, 2021. "The Cyclicality of IFC Investments : To Be, or Not to Be, Procyclical," Policy Research Working Paper Series 9746, The World Bank.
    11. Abdullah Alhassan & Mr. Michael G. Papaioannou & Martin Skancke & Cheng Chih Sung, 2013. "Sovereign Wealth Funds: Aspects of Governance Structures and Investment Management," IMF Working Papers 2013/231, International Monetary Fund.
    12. Caroline E Nowacki & Ashby Monk & Bertrand Decoster, 2021. "Who do sovereign wealth funds say they are? Using structural topic modeling to delineate variegated capitalism in their official reports," Environment and Planning A, , vol. 53(4), pages 828-857, June.
    13. Fong, Tom Pak Wing & Sze, Angela Kin Wan & Ho, Edmund Ho Cheung, 2022. "Do long-term institutional investors contribute to financial stability? – Evidence from equity investment in Hong Kong and international markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 77(C).
    14. Patty Duijm & Sophie Steins Bisschop, 2018. "Short-termism of long-term investors? The investment behaviour of Dutch insurance companies and pension funds," Applied Economics, Taylor & Francis Journals, vol. 50(31), pages 3376-3387, July.
    15. Gudjonsson Jon & Hougaard Jensen Svend E., 2023. "Pension Funds and Financial Stability: The Case of the UK Gilt Crisis," Intereconomics: Review of European Economic Policy, Sciendo, vol. 58(3), pages 155-159, June.
    16. Alessio Ciarlone & Valeria Miceli, 2014. "Are Sovereign Wealth Funds contrarian investors?," Temi di discussione (Economic working papers) 972, Bank of Italy, Economic Research and International Relations Area.
    17. Bradley Jones, 2016. "Institutionalizing Countercyclical Investment: A Framework for Long-term Asset Owners," IMF Working Papers 2016/038, International Monetary Fund.
    18. Bradley Jones, 2015. "Asset Bubbles: Re-thinking Policy for the Age of Asset Management," IMF Working Papers 2015/027, International Monetary Fund.

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