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Procyclical asset management and bond risk premia

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  • Barbu, Alexandru
  • Fricke, Christoph
  • Moench, Emanuel

Abstract

We use unique institutional securities holdings data to examine the trading behaviour of delegated institutional capital and its impact on bond risk premia. We show that institutional fund managers trade strongly procyclically: they actively move into higher yielding, longer duration and lower rated securities as yields fall and spreads compress, and vice versa. Funds more exposed to negative yields increase their risk-taking more strongly, and this effect is particularly pronounced for those offering explicit minimum return guarantees. Institutional funds' investments have large and persistent price impact in both corporate and sovereign bond markets. We provide evidence that this procyclical behaviour is driven by career concerns among institutional fund managers. JEL Classification: G11, G23, E43

Suggested Citation

  • Barbu, Alexandru & Fricke, Christoph & Moench, Emanuel, 2021. "Procyclical asset management and bond risk premia," ESRB Working Paper Series 116, European Systemic Risk Board.
    • Handle: RePEc:srk:srkwps:2021116
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    1. Leonardo Quero Virla, 2023. "An empirical characterization of volatility in the German stock market," SN Business & Economics, Springer, vol. 3(7), pages 1-19, July.
    2. Fricke, Daniel, 2021. "Synthetic Leverage and Fund Risk-Taking," ESRB Working Paper Series 126, European Systemic Risk Board.
    3. Ryan, Ellen, 2022. "Are fund managers rewarded for taking cyclical risks?," Working Paper Series 2652, European Central Bank.
    4. Ryan, Ellen, 2022. "Are fund managers rewarded for taking cyclical risks?," ESRB Working Paper Series 134, European Systemic Risk Board.
    5. Virla, Leonardo Quero, 2021. "An empirical characterization of volatility dynamics in the DAX," IPE Working Papers 167/2021, Berlin School of Economics and Law, Institute for International Political Economy (IPE).

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    More about this item

    Keywords

    asset price volatility; career concerns; demand pressures; institutional accounts; institutional funds; portfolio rebalancing; price impact; procyclical asset management;
    All these keywords.

    JEL classification:

    • 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
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects

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