Debt Derisking

Jannic Cutura (), Gianpaolo Parise () and Andreas Schrimpf ()
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Jannic Cutura: Directorate General Information Systems, European Central Bank, 60640 Frankfurt, Germany
Gianpaolo Parise: Finance Department, EDHEC Business School, EDHEC, 06200 Nice, France; Centre for Economic Policy Research, 06200 Nice, France
Andreas Schrimpf: Centre for Economic Policy Research, 06200 Nice, France; Monetary and Economic Department, Bank for International Settlements, 4051 Basel, Switzerland

Management Science, 2025, vol. 71, issue 1, 615-634

Abstract: We examine how corporate bond fund managers manipulate portfolio risk in response to incentives. We find that liquidity risk concerns drive the allocation decisions of underperforming funds, whereas tournament incentives are of secondary importance. This leads laggard fund managers to trade off yield for liquidity while holding the exposure to other sources of risk constant. The documented derisking is stronger for managers with shorter tenure and is reinforced by a more concave flow to performance sensitivity and by periods of market stress. Derisking meaningfully supports ex post laggard fund returns. Flexible net asset values (swing pricing) may, however, reduce derisking incentives and create moral hazard.

Keywords: mutual funds; incentives; derisking; fragility; bond liquidity; financial institutions; investment; finance; portfolio; financial institutions; markets (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:inm:ormnsc:v:71:y:2025:i:1:p:615-634

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