Cyclical investment behavior across financial institutions

Yannick Timmer

No 18, ESRB Working Paper Series from European Systemic Risk Board

Abstract: This paper examines the investment behavior of different financial institutions in debt securities with a particular focus on their response to price changes. For identification, we use security-level data from the German Microdatabase Securities Holdings Statistics. Our results suggest that banks and investment funds may destabilize the market by responding in a pro-cyclical manner to price changes. In contrast, insurance companies and pension funds buy securities when their prices fall and vice versa. While investment funds and banks sell securities that are trading at a discount and whose prices are falling, they buy securities that are trading at premium and whose prices are rising. The opposite is the case for insurance companies and pension funds. This counter-cyclical investment behavior of insurance companies and pension funds may stabilize markets whenever prices have been pushed away from fundamentals. Since our results suggest that institutions with impermanent balance sheet characteristics may exacerbate price dynamics, it is of crucial importance for financial stability to monitor the investor base as well as the balance sheets of both levered and non-levered investors. JEL Classification: F32, G11, G15, G20

Keywords: Cyclicality; Debt Capital Flows; Financial Stability; Portfolio Allocation (search for similar items in EconPapers)
Date: 2016-07
New Economics Papers: this item is included in nep-ban
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Citations: View citations in EconPapers (4)

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