Debt De-risking

Jannic Cutura, Gianpaolo Parise and Andreas Schrimpf

No 868, BIS Working Papers from Bank for International Settlements

Abstract: We examine the incentive of corporate bond fund managers to manipulate portfolio risk in response to competitive pressure. We find that bond funds engage in a reverse fund tournament in which laggard funds actively de-risk their portfolios, trading-off higher yields for more liquid and safer assets. De-risking is stronger for laggard funds that have a more concave sensitivity of flows-to-performance, in periods of market stress, and when bond yields are high. We provide evidence that debt de-risking also reduces ex post liquidation costs by mitigating the investors' incentive to run ex ante. We argue that, in the presence of de-risking behaviors, flexible NAVs (swing pricing) may be counter-productive and induce moral hazard.

Keywords: corporate bond funds; bond market liquidity; asset managers; risk-taking; competitive pressures (search for similar items in EconPapers)
JEL-codes: E43 G11 G23 G32 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-06
New Economics Papers: this item is included in nep-cfn and nep-rmg
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Related works:
Working Paper: Debt De-risking (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:bis:biswps:868

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